NBU keeps key policy rate at 18%, updates macroeconomic forecast

1 February 2019

The National Bank of Ukraine (NBU) announced on Jan. 31 it decided not to change its key policy rate at its board meeting that day, keeping it at 18% since July. The central bank noted that keeping the key policy rate at this rate will lower annual inflation to 5% in 2020, according to its press release. Consumer inflation dropped  to 9.8% yoy in 2018  from 13.7% yoy in 2017, the lowest in the last five years. The central bank believes that tight monetary policy was the major factor in curbing inflation, as consecutive increase of key policy rate increased the public's propensity to consume. In addition to monetary factors, the NBU also cited increased domestic supply of some foods and the decline of global food prices as important contributors to slowing inflation.

 

The NBU also confirmed its inflation forecast of 6.3% yoy in 2019 and 5.0% yoy in 2020. The upper end of the 4-6% target range should be reached in the beginning of 2020. Other inflation-restraining factors include prudent fiscal policy, slower growth of wages, relatively low volatility of the exchange rate, lower global prices for energy resources, and slow price growth for food commodities.

 

The downside of its tight monetary policy will be the slowdown of economic growth, the NBU admitted. The central bank expects Ukraine’s GDP growth to slow to 2.5% yoy in 2019 from 3.3% yoy growth in 2018 (according to the latest NBU estimate). A lower grain harvest (after the record high reached in 2018) and cooling growth of the world economy will be additional factors of Ukraine’s economic slowdown in 2019.  The NBU expects economic growth to accelerate to 2.9% yoy in 2020 and 3.7% yoy in 2021.

 

The NBU estimates that current account deficit amounted to 3.6% of GDP in 2018, and it will stay at 3-4% of GDP in 2019-2021. The deficit will shrink to 3.1% in 2019 due to expected growth of corn exports and lower energy prices. In 2020-2021, the current account deficit will enlarge due to the decline in gas transit, lower grain crops and increased imports of investment goods. The enlarged trade deficit will be compensated by the growth of private remittances by laborers abroad.

 

The key assumption of the NBU’s forecast is the continuing cooperation of Ukraine with the IMF and the accessibility of global financial markets for Ukraine. If these conditions hold, the NBU expects to keep its gross international reserves at USD 21 bln in 2019-2020. The increasing uncertainty related to presidential and parliamentary elections in 2019 is cited as a major risk to NBU projections.

 

The NBU noted that it might soften its monetary policy as soon as there is a consistent reduction of inflation-related risks, and the inflation trend will be in line with the central bank’s projections. At the same time, it can't rule out a key policy rate hike in case of increased fundamental inflationary risks and the realization of forecast risks.

 

Evgeniya Akhtyrko: It looks like the most of the NBU’s monetary committee members didn’t share the optimism of Governor Yakiv Smoliy, who recently stated that there are grounds for softening the central bank’s monetary policy. Indeed, it is better to wait until the slowing inflation trend extends for several months.

The next revision of the key policy rate is scheduled for March 14. By that time, it will be more clear whether or not the inflation trend keeps pace with the NBU’s expectations. In case of a confident downward inflation trend, the central bank is likely to lower the key policy rate by 0.5 pp.

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