The National Bank of Ukraine  keeps its headline inflation projection unchanged at 12% by the end of 2016 and 8% by the end of 2017, notwithstanding that in H1 2016 inflation slowed more rapidly than projected in April 2016.  Such inflation projections are in line with the NBU’s monetary policy objectives, reads the July 2016 Inflation Report.   

In H2 2016, annual headline inflation will return to the target,

• mainly on account of the reflection of further utility tariffs adjustments in price statistics.

• At the same time, core and raw food inflation will slow down at a faster pace than previously forecast. These price developments will be affected by a combination of  supply-side effects, amid lower hryvnia exchange rate volatility, and improving inflation expectations.

The  economic growth forecast remains unchanged: real GDP is expected to grow by  1.1% in 2016, and by 3.0% in 2017. The growth will accelerate to 4.0% in 2018. The unaltered forecast  reflects the mutually offsetting effects of divergent factors.

•  Thus, the global economic growth outlook has weakened mainly due to heightened downside risks to euro-area growth following the outcome of the Brexit vote. Furthermore, the increased uncertainties surrounding   Britain's exit from EU will also weigh on medium-term prospects. Overall, however, the external environment will be more favorable for Ukraine over the forecast horizon, mainly on account of higher than previously projected global prices for its main export commodities.

• In H2 2016, private consumption is expected to pick up slightly.  supported by a rapid slowdown of inflation and easing depreciation expectations.  However, private consumption growth is projected to remain moderate, being held back by  significant increases in utility tariffs and prudent fiscal policy.  Over the next few years, private consumption growth will be stronger, fueled by deferred demand, household income growth, and a projected revival in lending.

• Investment activity is expected to recover at a faster-than-projected pace. The need to reorient trade flows toward European markets will prompt Ukrainian exporters to increase investment, while taking advantage of more favorable terms of trade. At the same time, the rally in global energy prices and the adjustment of tariffs heating and gas tariffs  to cost-recovery levels will encourage the  development and deployment of energy saving technologies.

Also, we revised the current account deficit forecast downwards from USD 2.3 billion to USD 1.8 billion. Thanks to more favorable terms of trade and a projected increase in this year’s grain harvest, we expect the decline in exports volumes to decelerate to just 2% in 2016. A stronger recovery in exports will be held back by the imposition by the Russian Federation of a new round of restrictions on the transit of Ukrainian goods through its territory to Kazakhstan and Kyrgyzstan, effective from 1 July 2016. However, given the general trend of decreasing Ukraine’s foreign trade with Russia and other CIS countries in recent years, the impact of new restrictions will be much less painful than that of the previous ones. The downward revision in the  current account deficit forecast was also prompted by expectations of of lower volumes of natural gas imports and larger private remittances from abroad. Also, we do not expect the current account deficit to widen significantly in the coming years.

A key assumption of the baseline forecast scenario is continuing cooperation with the IMF, although the disbursements of official financing were delayed again.

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 are the input for monetary policy decision-making. The National Bank of Ukraine publishes the Inflation Report on a quarterly basis, starting from April 2015.