NBU keeps key policy rate to 8.5%, downgrades GDP outlook

The National Bank of Ukraine (NBU) announced on Oct.
21 that that it decided to keep its key policy rate unchanged at 8.5% at its
board meeting. This corresponds to the goal of curbing consumer inflation to
the target of 5% yoy in the mid-term.

 

In September, consumer inflation accelerated to 11.0% yoy
driven by a number of internal and external factors. Global commodity prices
remained high, and the fundamental pressure was steady. The regulator also
cites increased production costs for labor and energy resources, coupled with
high inflation expectations as other factors. At the same time, the situation
at Ukraine’s ForEx played as an inflation counterfactor.

 

The NBU keeps unchanged its consumer inflation
forecast for 2021 at 9.6% YTD. The regulator expects the price growth to peak
in September-October. Then, the trend should halt. The inflation will cool due
to the fading effect of the low comparative base, the favorable situation at
the ForEx market and high agricultural crop. In addition, the NBU’s tightened
monetary policy will also be a factor.

 

The central bank expects inflation to go down to 5%
yoy by the end of 2022, and it will stay around this level later on. High
prices for energy resources coupled with steady consumer demand will deter the
downward trend of inflation. Therefore, the regulator’s monetary policy in 2022-2023
is expected to be tighter than it was projected a quarter ago.

 

The regulator expects the current account deficit to
be at 1% of GDP in 2021. In 2022-2023 it will moderately enlarge to 3-4% of GDP
prompted by worsened terms of trade and increased consumer and investment
demand.

 

IMF cooperation is a major assumption of the central
bank’s forecast. The completion of the current stand-by program will ensure the
official financing in 2021-2022, better terms of external borrowing, as well as
the interest of international investors to UAH denominated assets. With IMF
financing, the NBU expects its international reserves to stay at around USD
30-31 bln in 2021-2023.

 

Now, the central bank forecast that the decline of the
key policy rate will be slower than it was expected a quarter ago. By the end
of 2022, the NBU sees it at 7.5% instead of 6.5% expected earlier.

 

The key risks to the central bank’s forecast include
the significant reinstatement of quarantine restrictions both in Ukraine and
globally as well as a prolonged inflation spike in the world.

 

Evgeniya Akhtyrko: The NBU’s decision to keep the key policy rate unchanged wasn’t a
surprise, given that the acceleration of inflation in September was within the
boundaries of the regulator’s forecast. We see the NBU’s outlook for the
inflation trend as plausible and therefore we don’t expect the key policy rate
to be hiked from the current 8.5%. At the same time, the worsened outlook for
inflation and key policy rate trends for 2022 mean that the period of high
interest rates in Ukraine is likely to extend.