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NBU Expects Inflation to Return to Target Range in Mid-2019

19 April 2018

Press Release


In 2018-2020, headline inflation will drop and gradually return to the target range as had been forecast in early 2018. Inflation is expected to return to its target range in mid-2019 and to correspond to its central point of 5% in 2020. Read more in the April 2018 Inflation Report.


The NBU has left its inflation forecast unchanged: as in its January forecast, the central bank expects headline inflation to gradually slow to 8.9% in late 2018. However, inflation will still exceed the target of 6% ± 2 pp.


The rapid expansion in consumer demand will continue to weigh on prices, keeping underlying inflationary pressures strong in the current year. This will be partially offset by the strengthening of the hryvnia exchange rate against the currencies of Ukraine’s main trading partners seen Q1 2018, which will help reduce inflationary pressures in the months ahead. As a result, core inflation will slow at a faster pace than expected in January, hitting 7.7% by the end of the year.


In the current year, the fairly high inflation rate will also be driven by the significant growth in administered prices (14.6% over the year), fueled by rising wages in the housing and utilities sector, higher energy prices, and an increase in the excise tax on tobacco goods.


Raw food inflation is projected to drop noticeably by the end of 2018 (to 5.9%), as the effects of supply factors on the commodity market, which had a decisive influence last year, wear off. At the same time, the expanding export potential of Ukrainian food producers will continue to put upward pressure on prices by decreasing the supply of food on the domestic market. Another inflation driver will be the continuing convergence of Ukrainian food prices with those in Ukraine’s trading partners, due to a pick-up in international trade.


Looking ahead, the tight monetary policy, an increased supply of food, and lower imported inflation will help bring inflation down. As a result, inflation will return to its target range by mid-2019, to stand at 5.8% by the end of next year. In 2020, inflation will decelerate to 5.0%, which will be in line with the central point of the target range (5.0% ± 1 pp).


Apart from revised macroeconomic forecasts, the April 2018 Inflation Report also deals with the following specific topics:


- A review of the recent changes to U.S. trade policy


On 23 March 2018, the United States imposed additional import duties on steel (25%) and aluminum (10%) with a view to protect its domestic market. The United States also declared its intention to introduce additional import tariffs on Chinese imports (totaling USD 50 billion) for alleged violations of intellectual property rights. In turn, a number of countries announced they are considering retaliatory measures, while leading international organizations (the World Trade Organization and the International Monetary Fund, in particular) have expressed concern over the rising risk of full-scale trade wars.


There will be little direct impact from the import duties imposed on steel and aluminum on Ukraine, as in 2017 exports to the United States accounted for only about 2% of total Ukrainian exports, and about 6% of exports of ferrous metals and products thereof. However, spillover effects of retaliatory measures taken by other countries can arise from decreasing global commodity prices and slowing global economic growth.


- Revisions of statistics on private remittances to Ukraine and their influence on the Balance of Payments


In March 2018, the NBU revised its methodology for calculating private remittances. The revision was prompted by a number of new domestic and foreign migration and remittances surveys released recently. The new data confirmed significant structural changes in Ukraine’s migration processes that started in 2014, which were previously evident from open-source data, such as Internet data.


Consequently, in 2015–2017, the amount of remittances was revised upwards by about USD 2 billion every year, and reached USD 9.2 billion in 2017.


After the revision, Ukraine returned to the Top-15 countries in terms of the absolute value of remittances, according to World Bank data on other countries. The data revision also revealed the increased importance of private remittances as a source of Ukraine’s foreign currency revenues, which have mitigated the adverse impact of a drop in export earnings and foreign direct investment during the financial crisis.


Due to the revision of remittances, the current account balance for the corresponding years was also adjusted, although this did not affect the overall Balance of Payments, as there were adjustments to the counterbalancing items in the financial account.


- The role of foreign investors in the domestic market of government securities


Foreign investors’ demand for hryvnia domestic government bonds started to grow since autumn 2017. The total principal amount of hryvnia bonds held by non-residents grew from zero in August 2017 to nearly UAH 14 billion as of early April 2018. The higher demand from foreign investors for Ukrainian hryvnia-denominated securities was propelled by higher yields on government securities, particularly owing to the NBU’s tight monetary policy, and tax changes amid still loose global financial conditions.


The role of foreign investors in the domestic market of government securities could be quite important. Economic studies show that the presence of non-residents puts downward pressure on bond yields, deepens and improves market efficiency.


At the same time, excessively large foreign capital inflows, particularly given volatile nature of short-term inflows, may increase the country’s vulnerability to external shocks. However, the NBU assesses risks arising from external portfolio investment inflows as low.


First, non-residents account for around 2% of the total amount outstanding of hryvnia domestic government bonds issued, while the ratio of non-resident holdings of local government bonds to gross international reserves stands at only 3%.


Second, foreign currency purchased from foreign investors will serve as a safety cushion, if monetary policy easing triggers short-term capital outflows.


Third, the NBU’s adherence to a floating exchange rate regime helps contain speculative capital inflows.


Fourth, the government limited the placement volume of domestic government bonds with maturities of three and six months to UAH 500 million, which restrained the rise in yields on short-term securities, and boosted the supply of long-term government securities.



The Inflation Report reflects the opinion of the National Bank of Ukraine as to the current and future economic state of Ukraine, with a focus on inflationary developments, which form the basis of monetary policy decision-making. The National Bank of Ukraine has published its Inflation Report on a quarterly basis since April 2015.

Last modification   19.04.2018