NBU considers current monetary policy tight enough

13 March 2018

The National Bank of Ukraine (NBU) disclosed more details on its latest decision to hike the key policy rate by 1pp to 17% in minutes published on its website of the monetary policy committee meeting on March 1. The minutes reveal that all eight present committee members agreed on the need to raise the key policy rate for the fourth time in order to reach the inflationary target in the mid-term.


Six members spoke out for raising the rate by 100 bp, while one member was for two consecutive hikes by 50 bp, and another one suggested a hike by 75 bp. The committee hadn’t seen any “events that would alleviate inflationary pressure” since the previous hike of the key policy rate on Jan. 25. All inflationary risks remain relevant, it said, including the postponement of the next IMF loan tranche, high inflationary expectations and increasing consumer demand.


All the committee’s members agreed that “the next hike in April is not apparent”. This position was different from January’s meeting, when most members shared the opinion that another consecutive hike is very likely. Instead, the NBU warned that the rate might be raised unless significant signs of lowering inflationary pressure are observed.


In the NBU’s opinion, January’s hike of the interest rate stimulated foreign capital inflow to the country. At the same time, the central bank is aware that the recent capital inflow was mostly channeled to short-term debt securities, which might pose some risks to the external sector of the economy.


It was also mentioned that the hike of the key policy rate drove bank interest rates on retail deposits higher. However, banks are reluctant to adjust interest rates on longer deposits to avoid the losses in net interest income.


Evgeniya Akhtyrko: The key policy rate of 17% leaves a significant gap to the February’s consumer inflation of 14% yoy. So far, we do not see risks of inflation accelerating during 2018. That said, we see only very negative developments in Ukraine-IMF talks regarding the next loan tranche will prompt the NBU to resort to another key policy rate hike in the next meeting scheduled for April 13.