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NBU keeps key policy rate at 18%

NBU keeps key policy rate at 18%

14 December 2018

The National Bank of Ukraine (NBU) announced on Dec.
13 it decided not to change its key policy rate at its board meeting that day,
keeping it at 18% since July. The central
bank considers current monetary conditions “tight enough” to slow inflation to
the mid-term target rate of 5%, according to its press release.

 

The NBU noted that consumer inflation, which amounted to 10.0% yoy in November,
met its projections. At the same time, it expects inflation to decline and
reach a target rate of 5% by the end of 2020. Tight monetary policy will be the
major factor of cooling inflation, it said.

 

Responding to the tight monetary policy, commercial
banks have been hiking interest rates on savings deposits, which was aimed at encouraging
savings and restraining consumer demand. In addition, a number of domestic and
external factors reduced inflationary risks in Ukraine. Finally, the NBU
emphasized the progress in Ukraine-IMF cooperation under a new stand-by arrangement as a key
factor in its decision.

 

The central bank sees several risks that could delay
achieving its inflation target. First, the growth of wages will maintain high
consumer demand, creating inflationary pressure. Second, expectations might
deteriorate as the new political cycle evolves. Third, geopolitical risks,
including escalation in the Azov Sea, might result in falling export receipts.
Finally, Ukraine’s economy might be affected by an expected cooling of the
world economy.

 

The NBU admits that the overall risks for achieving
the target inflation of 5% are still high. Therefore, a further hike of the key
policy rate is possible.

 

Evgeniya Akhtyrko: The NBU’s
decision to keep the policy rate unchanged was in line with our forecast.
Overall, it’s a good signal to the market, which could at least partially
diminish nervousness amid growing political uncertainty. This also means that
the interest rate on UAH-denominated local bonds at the primary market is not
likely to increase.

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