Ukraine central bank cuts policy rate 0.5pp to 15.0%

The board of directors of Ukraine’s central bank (NBU) ruled on Sept. 15 to cut its policy rate by 0.5pp to 15.0%, it announced in a press release. It was the fifth consecutive policy rate cut since April 22, amounting to a 7.0pp total reduction from 22%. The NBU referred to further reduced inflation risks (August CPI was +8.4% yoy) and the IMF’s decision to extend the next loan tranche as key factors that allowed it to go forward with monetary easing. It believes the recent volatility on the foreign currency market won’t affect Ukraine’s 2016 inflation rate, which is still expected to be within the target range of 12%, +/- 3pp.

The NBU promised to further cut its policy rate in case risks to price stability continue easing. The regulator announced its next meeting will be held on Oct. 27 to consider a revision of the policy rate.

Alexander Paraschiy: With relatively low inflation so far, and good news from the IMF a day before, some decrease in the policy rate was widely expected. The revision of the key rate will have an immediate effect on money markets since the NBU pegs the interest rate of its two-week certificates of deposit to the policy rate.

The decline in NBU deposit rates should further stimulate banks to seek more profitable ways to invest its funds, including growth of lending to the economy. However, this time we do not expect any significant effect from the rate cut.

With expected seasonal pressure on the Ukrainian currency, as well as anticipated accelerated inflation due to utility rate hikes in September and October, the NBU will be less likely to further cut the policy rate in October. In the best case, we expect it might decrease the rate further by 0.5pp next month.