Ukraine central bank hikes key policy rate 0.5pp to 18%

The National Bank of Ukraine (NBU) hiked its key
policy rate to 18.0% from 17.5% as of Sept. 7 in order to achieve inflation targets
amid increasing external risk factors, the regulator reported in its Sept. 6
press release. The decision was reached despite the current disinflationary trend.

 

July consumer inflation slowing to 8.9% yoy, and core
inflation cooling to 8.8% yoy, was in line with the NBU’s forecast, the release
mentioned. As factors, the regulator cited higher supplies of domestic and
imported foods and hryvnia appreciation in 1H18. Meanwhile, relatively high core
inflation still points to “persisting fundamental inflationary pressure,”
the NBU said.

 

The slowdown won’t be sustained in 4Q18 because of
expected hikes in prices that are administratively regulated, particularly natural
gas. High consumer demand and consumer price growth will also play a role.

 

At the same time, tight monetary policy, embodied by
the high key policy rate, should curb pro-inflationary factors. The NBU
emphasized that continuing cooperation with the IMF is a key factor in keeping
inflation at targeted levels.

 

The regulator also believes that increased devaluation
pressure during the summer months should not substantially affect the current
trend of consumer inflation. Indeed the currencies of most of Ukraine’s major
trading partners – including Russia and Turkey – devalued more during this
period.

 

The central bank has kept unchanged its 2018 consumer
inflation forecast of 8.9% yoy. It also reiterated that the target range of
4-6% yoy will be reached at the end of 2019, while the mid-term inflation
target of 5% will be achieved in 2020.

 

External risks have swelled since the previous revision of the key policy rate on July 12,
the NBU stated. In particular, it mentioned rising pressure on currencies of
emerging economies caused by capital run. This might impede the access of
Ukrainian borrowers to global markets and harm Ukrainian exports.

 

Additional risk factors are hryvnia volatility and
worsening inflation related to the 2019 presidential and parliamentary
elections, the release said.

 

Evgeniya Akhtyrko: We reported
about the higher likelihood of a policy rate hike amid
deteriorating external conditions. In addition, the Ukrainian government and
IMF are still negotiating outstanding issues during the current IMF mission to
Ukraine, which will perform its review between Sept. 6 and 19.

 

Interest rates on domestic bonds are very likely to
rise after this rate hike, increasing the debt burden. Moreover, there is no
prospect for any essential moves at the commercial credit market while the
policy rate is this high.

 

We expect the outcome of the current IMF mission
will be positive. Therefore, only substantial deterioration on the external
markets and/or the emergence of other essential risks might result in a further
hike of the key policy rate.