The National Bank of Ukraine expects headline inflation to moderate to 12% yoy by the end of 2016 and to 8% yoy by the end of 2017. Such projections are in consistent with the NBU’s monetary policy objectives, reads the Inflation Report (January 2016).

Inflationary pressures will be dampened by low world food prices amid limited export ability due to new trade restrictions, declining inflation expectations, and the fading effects of depreciation. Further upward adjustments in administrated prices will further push inflation up in 2016, although their effect on inflation will not be as significant as in 2015.

Subdued aggregate demand will continue weighing on domestic price pressures. Although the NBU’s previous estimates that the economy bottomed out in the first half of the year proved true, the pace of economic recovery is very slow. At year-end, the decline in real GDP was estimated at around 10.5%.

In 2016, Ukraine’s economy will resume growth, but it is likey to be more modest, underperforming the growth projections provided in the previous Inflation Report. The NBU has revised its 2016 GDP growth outlook downward from 2.4% to 1.1%.The downward revision has been prompted by falling global commodity prices amid worsening global economic outlook and new trade restrictions imposed by the Russian Federation (information to this effect is available in a special box). All these three factors will lead to a further decline in exports and cause the current account deficit to widen to USD 2.5 billion (versus USD 1.2 billion as previously projected).

The outlined projections are reflected in the baseline forecast scenario, which is the most likely to occur. The baseline scenario rests on the assumption that the situation in the east of the country won’t deteriorate, Ukraine will continue cooperation with the International Monetary Fund, global commodity prices will stabilize, and banks will gradually resume lending. At the same time, the Inflation Report also considers other scenarios.

The Inflation Report reflects the opinion of the Monetary Policy Committee of the National Bank of Ukraine (the Committee) as to the current and future economic state of Ukraine with a focus on inflationary developments, which are the basis for monetary policy decision-making. The National Bank of Ukraine publishes the Inflation Report on a quarterly basis, starting from April 2015.