NBU reinforces monetary softening, lowers key rate by 2pp

The National Bank of Ukraine (NBU) announced on Dec. 12
it decided to lower its key policy rate by 2.0pp to 13.5% at its monetary
policy board meeting. The central bank is reinforcing monetary softening amid
an accelerating appreciation of the national currency, the hryvnia, that has
resulted in a faster-than-expected decline in inflationary pressure. In
November, consumer inflation chilled to 5.1% yoy, considerably lower than was
expected by the NBU (6.3% as of end-December). Therefore, consumer inflation
reached the mid-term target that was declared by the NBU in 2015.

The NBU noted that slowing core inflation, coupled
with declining prices for energy resources, are an indicator of lower
inflationary pressure. Hryvnia appreciation is another factor of consumer
inflation cooling and improved inflationary expectations. These factors leveled
out the pressure on prices generated by high consumer demand and a smaller
harvest of certain vegetables, the NBU noted.

The central bank argued that excessive supply of
foreign currency in October-November was generated by export receipts,
particularly the record harvest of grains and oilseeds, as well as from the
sales of foreign currency receipts from the external borrowing of Ukrainian
state companies. At the same time, increased inflow from the sales of local
bonds to foreign investors was not a major factor of the appreciation during
this period, the NBU insists.

The NBU remarked that the IMF staff-level agreement attained this week
is a “fundamental milestone” in the implementation of structural reforms in
Ukraine, as well as maintaining macroeconomic stability and sustainable
economic growth.

The regulator also mentioned that the risks related to
potentially destabilizing court decisions and increasing political pressure on
the central bank are still in place. The realization of those risks might
impede access to the international capital markets during the periods of peak
state debt repayments.

Evgeniya Akhtyrko: The
reinforcement of monetary policy was a solid reaction to unexpected changes in
the economy. This decision should also help the NBU to strengthen its position
in its fight against the recent critics of the monetary policy.

Above all, this decision is a positive signal to
investors that reaffirms that the NBU has upheld its independence and has
gained confidence in assessing positive trends in the economy, particularly in
noting decreased risks and projecting positives trends to continue.