NBU keeps key policy rate at 6%, worsens CPI outlook

22 January 2021

The National Bank of Ukraine (NBU) announced on Jan. 21 that it decided not to change its key policy rate at its monetary policy board meeting that day, keeping it at 6%. It has stayed unchanged since June. The central bank’s further policy will aim to strike a balance between responding to inflation risks and supporting economic renewal, the NBU noted in a statement published on its website.


In 2020, consumer inflation sped up to 5.0% YTD, in the middle of the NBU inflation target range of 4-6%. Accelerating inflation was due to the dynamic renewal of the global economy, the growth of domestic consumer demand, as well as growing prices for energy resources and some food items.


The NBU revised its forecast of consumer inflation to 7.0% from 6.5% YTD in 2021. The inflation will accelerate in 1H21 due to high consumer demand, increased prices for energy resources and the lower crop of 2020. In addition, the growth of administratively regulated prices will remain strong due to hiked excise duties for alcohol and tobacco and higher prices for energy resources.


Then, the inflation trend will halt as the inflationary factors will weaken. The supply of agricultural produce will increase with a new crop, and the effect of the low comparative base will wear off by the year end. The central bank expects consumer inflation to return to its target range in 1H22. In 2022-2023, it will stay around its mid-term target of 5%.  


Ukraine’s GDP dropped 4.4% yoy in 2020 (vs. 6.0% yoy in its October forecast), according to NBU estimates. The fast renewal of the economy in 2H20 was mostly caused by growing domestic consumption. Meanwhile, investment activity remained weak. The NBU expects Ukraine’s economy to grow 4.2% yoy in 2021. In 2022-2023, it will grow around 4% yoy, driven mostly by high consumption demand boosted by the public's growing income.


IMF cooperation is a major assumption of the central bank’s forecast. Financing from the IMF and other international partners is critical for executing planned budget expenditures in 2021. The major risks to the macroeconomic forecast include the reinforcement of quarantine restrictions both in Ukraine and globally, as well as the substantial inflow of foreign capital, which might lessen inflationary pressure through the exchange rate channel.


The NBU stated that it is ready to hike the key policy rate in order to return inflation to its target range.


Evgeniya Akhtyrko: It’s very likely that consumer inflation will go beyond the upper end of the inflation target range as soon as January. So, the latest NBU decision to keep the key policy rate at 6% doesn’t look like a proactive approach.


The next revision of the key policy rate is scheduled for March 4. We expect the key policy rate will be hiked by up to 100 bps.

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