Ukraine central bank cuts policy rate 0.5pp

The board of directors of Ukraine’s central bank (NBU) decided to cut its policy rate 0.5pp to 12.5% on May 25, according to an NBU press-release. In April, inflation slowed to 0.9% m/m (+12.2% yoy) vs. 1.8% m/m (+15.1% yoy) in March, which appeared to be less than the NBU projected. Also, in April and May there was a steady trend of hryvnia strengthening despite the broken relations with occupied Donbas. Ukrainians have been actively selling foreign currency, which made the NBU run interventions on the ForEx to prevent the national currency from stronger appreciation.

The NBU provisionally observes faster inflation in May; however, it still anticipates a slowdown in price tendencies till the end of 2017. The yearend inflation target (8% +/- 2%) still looks feasible, according to the NBU. At the same time, the NBU noted that the plans of the Cabinet to increase pensions (possibly from October 2017) might put the target at risk. The next NBU board meeting to consider a revision of the key rate is scheduled for July 6.

Alexander Paraschiy: The NBU keeps signaling that everything goes well in Ukraine. Inflation slows, hryvnia strengthens. Moreover, it looks like the NBU’s increase of 2017 CPI forecast to 9.1% (from 8.0%) in January, to account for a doubled minimum wage by the government, looked too pessimistic. CPI statistics might be higher (in year-on-year terms) over the upcoming months due to a low comparative base, but it will slow close to 9.0% yoy by December, we expect. In this regard, the optimistic mood of the NBU looks justified.

At the same time, hryvnia prospects are under a question mark. Provisional customs statistics tell us about a sharp exports slowdown, which reflects a decline of resource prices on global markets. This trend promises the return of depreciation in the coming weeks. The potential pensions increase also should be kept in mind. Such developments give some room for a minor policy rate cut at the next board meeting, but further on we would anticipate more cautious monetary policy from the NBU.