Ukraine central bank keeps key policy rate at 18%

15 March 2019

The National Bank of Ukraine (NBU) announced on March 14 it decided not to change its key policy rate at its monetary policy board meeting that day, keeping it at 18.0%, or the same level since July. The central bank emphasized that tight monetary policy is an “important precondition” for lowering annual inflation to the target of 5.0% in 2020, according to its press release. The NBU noted that in January-February, consumer inflation continued to slow in line with the trend projected in its January inflation report. In February, inflation cooled to 8.8% yoy while core inflation slowed to 7.8% yoy, indicating reduced fundamental inflationary pressure.


The NBU stated its concern about recent rising of social payments, coupled with the government's decision on monetizing housing subsidies (switching to direct cash compensation to subsidy recipients instead of compensation to utility providers). While the individual effect of these factors are not significant, in combination they might affect the public's inflationary expectations, especially amid rising uncertainty related to two major elections scheduled for this year. 


At the same time, the central bank cited continued appreciation as an inflation restraining factor. The regulator believes that its previously identified risks that could disrupt projected inflation rates are still valid.


The NBU noted that it sees the possibility for lowering the key policy rate in the future. Reduced inflation risks, coupled with better expectations, should be the key factors for this action. The decision-making on the key policy rate will be based on the NBU’s macroeconomic upgrade to be published in April.


Evgeniya Akhtyrko: The NBU preferred not to rush to soften monetary policy, although the confident downward inflation trend of recent months raised expectations that the key policy rate might be lowered this time. Apparently, the regulator wants to make sure that monetizing subsidies and raising pensions will not result in the inflation trend deviating from the projected one.


If the NBU keeps the same inflation projections in its forecast update in April, it will likely decide to lower the key policy rate at its next monetary policy board meeting on Apr. 25.

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