25 May 2017
The Board of the National
Bank of Ukraine has decided to cut the key policy rate to 12.5%, effective 26 May 2017. The decision to
ease monetary policy is consistent with the pursuit of inflation targets set
for 2017-2018 and will help propel the economic growth in Ukraine.
As expected, headline inflation slowed to 12.2% yoy
in April 2017. The slowdown was primarily due to the waning base
effect (natural gas tariffs surged in April 2016, which affected this year's
actual inflation came in slightly below the projected path of annual headline
inflation published by the NBU in the Inflation Report (April 2017), envisaging
a slowdown in the annual CPI to 9.1% by the end of 2017. The shortfall can be
attributed to weaker-than-expected underlying inflation pressures.
April, the hryvnia continued to appreciate against U.S. dollar, underpinned by
substantial FX revenues from agricultural exports. Also, Ukraine continued to
enjoy significant FX revenues from metallurgical exports despite the negative
effect of the halted freight traffic across the contact line in Donetsk and
Luhansk Oblasts and the seizure of enterprises in the non-government controlled
areas of Ukraine. Meanwhile, households
continued to actively sell foreign currency in the cash FX market, with banks’
net FX purchases having reached USD 982 million since the start of the
year. This allowed banks to maintain
the foreign exchange supply in the interbank FX market.
turn, the NBU, remaining committed to a flexible exchange regime, did not
counteract a gradual appreciation of the hryvnia but has been purchasing an excess supply
of foreign currency in the interbank market to replenish international
reserves. Overall, the NBU’s net FX purchases have reached over USD 1 billion
since the beginning of the year.
stable situation in the FX market brought about an improvement in inflation
expectations. As a result, core inflation remained flat at 6.3% in April, while
the NBU had projected it to accelerate slightly.
to the preliminary estimates of the NBU, inflation in annual terms accelerated in May,
which was in line with inflation forecast, published in April. This acceleration was primarily driven by a rise in
raw food prices and an increase in administered prices and tariffs.
meantime, consumer demand is gradually gaining momentum, which was also
incorporated in the macroeconomic forecast approved at the previous NBU Board
meeting on monetary policy. Thus, real wages kept increasing, including due to
an increase in the minimum wage from the beginning of the year. As a result,
retail trade turnover continues to recover, having increased by 6.1% yoy in April.
economic growth indicators are close to the NBU projections. In Q1 2017, real
GDP rose by 2.4% yoy. The slower pace of GDP growth
compared to the end of 2016 can be attributed to the halted freight traffic
across the contact line in Donetsk and Luhansk Oblasts and the seizure of
enterprises in the non-government controlled areas of Ukraine. These developments brought about a decline in
industrial production and adversely affected the wholesale trade and freight
considers that the inflation targets for 2017 and 2018 (8%+/-2 pp and
6%+/-2 pp, respectively) remain within reach.
to the inflation projections published in the Inflation Report last month,
inflation is expected to slow to 9.1% by the end of 2017 and to 6.0% by the end
regulated price inflation and tight monetary and fiscal policies will be the
major driving force behind the disinflation. Meanwhile, a gradual recovery in
consumer demand and potential supply-side shocks in global food commodity
markets will pressure inflation upwards. A weakening of US dollar in global
markets that can potentially push up import prices for goods, also adds to
before, the NBU expects that the halted freight traffic across the contact line
in the Donetsk and Luhansk oblasts will have no significant impact on the
A major risk for the achievement of inflation targets
for 2017-2018 arises from a departure from the prudent fiscal
policy. In particular, there is a risk that the government will raise social
standards and wages to a level higher than that consistent with the meeting of
considers the implementation of a pension reform to be a vital step to ensure
sustainable public finances and hence price stability in a long-term
perspective. However, over the short-term, a hike in pension payments can push
consumer demand up. Consequently, the
NBU may be required to adjust its policy to level off short-term repercussions
of such an increase on price dynamics.
progress in structural reforms, especially those specified as Ukraine’s
commitments under the EFF program with the IMF, is necessary to preserve the macrofinancial stability.
in mind the inflation forecast and the balance of risks pertaining its
implementation, the NBU Board has decided to cut its key policy rate to 12.5%.
ahead, the NBU may continue easing the monitory policy, provided the mentioned
risks will be diminishing in a sustainable manner.
and the size of a further key policy rate cut will be conditioned on the
assessment of mid-term risks associated with the achievement of inflation
targets in 2017, and, more importantly, in 2018. In contrast to 2016 when the
key policy rate was cut by 8 p.p., the rate is expected to decrease less
markedly in 2017, at the beginning of which the rate was 14% per annum.
the easing of monetary policy, when proceeded, can take different forms - both
by reducing key policy rate and relaxing administrative restrictions in the FX
policy rate cut to 12.5% has been approved by NBU Board Decision No. 318-D On the Key Policy Rate of 25 May 2017.
meeting of the NBU Board on monetary policy issues will be held on 6 July 2017 as