NBU keeps key policy rate at 7.5%

The National Bank of Ukraine (NBU) announced on June
17 that it decided to keep its key policy rate unchanged at 7.5% at its board meeting
that day. The NBU starts wrapping up its anti-crisis monetary tools in order to
facilitate inflation cooling.

In May, consumer inflation accelerated to
9.5% yoy, going beyond the NBU’s forecast. The regulator notes
that this was mostly the result of price increases for the most volatile
components of the consumer basket caused by short-term factors. The low
comparative base of the previous year also mattered.

The core inflation also accelerated, reaching 6.9% yoy
due to increased prices for sunflower oil and related products. Meanwhile, the
NBU doesn’t see any signs of growing fundamental inflation pressure above the
expected level. Inflation expectations of the population remain elevated, but
they stabilized during the recent months.

The NBU expects inflation to start cooling in 4Q21
alongside the stabilization of world prices and the new agricultural supply to
the market. Tighter monetary policy should calm down the inflation expectations
and alleviate the inflation pressure.

IMF cooperation is a major assumption of the central
bank in its decision making. The IMF loan is an important source for financing
the budget deficit; it is also a positive signal for international investors.
The cooperation with the IMF and other international partners will help a
faster economic recovery from the consequences of the coronavirus crisis. The
Covid pandemic remains a major risk.

The NBU noted that it doesn’t rule out the hike of the
key policy rate if the fundamental inflation pressure reinforces and inflation
expectations worsen, thus threatening the realization of the 5% yoy inflation
target in 2022. 

Evgeniya Akhtyrko: The NBU
decision was in line with our expectations. Given the nature of the current
inflation spike, the hike of the key policy rate wouldn’t be an effective
action to curb it.

The next revision of the key policy rate is
scheduled for July 22. Should consumer inflation get another boost in June, the
NBU is likely to have more rationale for hiking its key policy rate and
altering its previous plan to keep it at 7.5% through the year-end.