Tight monetary policy needed to reach mid-term inflation target, NBU insists

The National Bank of Ukraine (NBU) disclosed more
details of its July decision to increase its key policy rate by
0.5pp to 17.5% in the minutes of the monetary policy committee meeting
published on July 23. The minutes reveal that eight out of nine committee
members spoke out for the need to increase the rate. In particular, five
committee members called for a hike of 100 bps to 18.0%, three members were for
an increase of 50 bps to 17.5%, and only one member spoke out for keeping the
rate on the then-current level of 17.0%.

The committee cited several factors which could be
obstacles for reaching the inflation target of 4-6% in 2019. Firstly,
consumption demand stays high as confirmed by high core inflation (9.0% yoy in
June). Secondly, investors’ interest in emerging markets is lowering amid
tightened monetary policy in advanced countries. Thirdly, the delay in the
decision regarding the disbursement of the IMF loan tranche to Ukraine
narrows the opportunities for borrowing on the international capital markets.
Finally, inflationary expectations stay high regardless of the already tight
monetary conditions.

The committee members agreed that a further increase
of key policy rate would follow, should the probability of the risk discussed
increase or new risk emerge.

Evgeniya Akhtyrko: We believe that the absence of clear prospects to secure the next IMF
loan tranche was the major reason behind the NBU’s decision to hike the key
policy rate. The absence of a government decision on raising natural gas
tariffs for households is the major obstacle for reaching a positive outcome to
the Ukraine-IMF talks at the moment. Should the government fail in securing the
IMF loan, we are very likely to see the higher key policy rate as soon as
September.