13 December 2018
The Board of the National Bank of Ukraine has
decided to keep its key policy rate at 18.0% per annum. The current and
forecast monetary conditions are sufficiently tight to bring inflation to its
medium-term target of 5% in 2020.
In November 2018, annual consumer price
inflation came in at 10.0% and was close to the NBU’s latest forecast published
in the October 2018 Inflation Report. The acceleration of inflation as compared to
previous months was anticipated and driven by several reasons.
First, the underlying inflationary pressure
remained high. Last month, core inflation increased slightly to reach 8.9% yoy, pushed up by the further growth in production costs,
wages in particular, and the pressure from consumer demand.
Second, administered prices were a major
inflation factor, as natural gas prices for households grew in November.
However, inflation is expected to decline
and reach the 5.0% target at the end of 2020, as projected in the NBU’s October
Tight monetary conditions will be the main
factor behind the deceleration of inflation. In particular, interest rates on
hryvnia household deposits continue to grow, as expected, in response to the
previous key policy rate hikes. This makes saving more attractive and restrains
At the same time, pro-inflation risks have
weakened since the previous decision due to a number of new favorable factors –
both internal and external.
the record harvest of corn and sunflower, which
will make these crops and related products cheaper (sunflower oil, feed, etc.)
a drop in global energy prices that will gradually pass through to
arrangements reached between the US and China to stop raising tariffs,
which reduces the risk of global trade wars
expectations of a less aggressive interest rate hike by the US Federal
Reserve System next year
favorable FX market conditions. These factors, together
with a tight fiscal policy, increased the net supply of foreign currency on the
interbank market, and a strengthening in the hryvnia exchange rate in November
and December. The surfeit of foreign currency on the FX market enabled the NBU
to further increase international reserves – since the beginning of Q4, the
central bank has purchased over USD 700 million net.
Important is also the significant progress
achieved in continuing cooperation with the IMF under a new stand-by
arrangement, as well as receiving related financing from other official
lenders. This was a key assumption of the NBU’s macroeconomic forecast.
These factors have led to a reasonably fast
improvement in the inflation expectations of households, which, however,
continue to exceed the central bank’s inflation target by a large margin.
However, there are significant risks which,
when materialized, could delay the NBU’s meeting its inflation target:
robust consumer demand, fueled, among other things, by higher wages,
putting further pressure on prices
a worsening of expectations, due to a new political cycle
geopolitical risks, such as an escalation of the Azov Sea conflict,
which could cut export earnings
the expected slowdown in the global economy,
including in the economies of Ukraine’s main trading partners.
When making its previous monetary policy
decision in October, the NBU said that it could raise the key policy rate again if
inflation pressures did not ease or even build up. In light of weakening
pro-inflation risks, the NBU Board has decided to keep the key policy rate
Meanwhile, risks to inflation decreasing to
its 5% target still remain high. If these risks materialize, the NBU may
raise the key policy rate to a level required to bring inflation back to its
target within a reasonable timeframe.
The decision to keep the key policy rate at
18.0% has been approved by NBU Board Policy Rate Decision No. 834, dated 13
A summary of the discussion by Monetary Policy
Committee members that preceded this decision will be published on 26 December
The next meeting of the NBU Board on monetary
policy issues will be held on 31 January 2019 as scheduled.