NBU rushes to cut key policy rate by 200 bps, updates macro forecast

The National Bank of Ukraine (NBU) announced on Apr.
23 that it cut its key policy rate by 2.0pp to 8.0%, citing its board’s decision
that day. The central bank is continuing its monetary softening cycle aiming to
support the economy affected by the coronavirus pandemic and quarantine. The
NBU noted that consumer inflation cooled to 2.3% yoy in March, and the
preliminary observations imply that inflation will stay low in April as well.
The central bank expects consumer inflation to reach 6% YTD in 2020, meaning
that it will stay in the target range of 4-6%. Government fiscal and monetary
initiatives aiming to support business and individuals should counteract the
drop in consumer demand.

The central bank downgraded its 2020 GDP forecast to a
5.0% yoy drop (vs. 4.0% yoy growth in January’s forecast). The negative impact
of the pandemic on Ukraine’s economy will be relatively short-lasting but
powerful, the NBU expects. The quarantine restrictions have already resulted in
lower business activity, consumption and employment. The largest economic
decline is expected in 2Q20 with a subsequent recovery in 2H20. The NBU
forecasted the current account deficit at 1.7% of GDP in 2020 (vs. 3.2% of GDP
in its previous forecast).

As previously, the key assumption of the NBU’s
forecast is Ukraine’s continued cooperation with the IMF. The updated forecast
assumes that the first tranche of the IMF financing will be received in 2Q20.
The central bank believes that this financing will help to cover the increased
budget deficit, cover the peaks of debt repayments and finance the initiatives
of business and consumer support. The IMF support, coupled with expected
financing of other IFIs, will enable maintaining gross international reserves
at USD 27-29 bln in the mid-term.

The major risk of the NBU’s forecast is a failure in
securing the IMF loan program. Another important risk includes a longer-than-expected
duration of the pandemic, with corresponding extensions of lockdown
restrictions. As in its previous forecast, the National Bank expects to lower
its key policy rate to 7.0% at the end of 2020. More intensive monetary
softening is possible if the economy needs more significant stimuli.

Evgeniya Akhtyrko: Responding
to the new challenges brought by the pandemic, the NBU resorted to more
intensive monetary softening. Recall, the previous forecast of the key policy
rate assumed that by the end of 1H20, the key policy rate will be at 9%.

This action is not likely to find a fast and effective
response from Ukrainian business. In particular, Ukraine’s commercial banks are
likely to have their own risk assessments of potential borrowers and the economy
overall. Given the high uncertainty of the current economic situation,
Ukrainian banks are likely to put their lending programs on hold.

This move is also unlikely to have any influence on
the domestic debt market given the near-zero chances of MinFin placing any new
UAH-denominated bonds on the market in the nearest weeks.