The National Bank of Ukraine has held a roundtable discussion involving external experts to discuss the NBU’s updated macroeconomic forecasts and the NBU Board’s proposals to the Monetary Policy Guidelines for 2018 and Medium Term.
During the first part of the event, NBU Deputy Governor Dmytro Sologub and Director of the Monetary Policy and Economic Analysis Department Mr Sеrhii Nіkоlаichuk discussed with the participants the outlook for Ukraine's economy for 2017-2019 described in the latest quarterly Inflation Report (July 2017).
The NBU has left inflation projections for 2017, 2018, and 2019 unchanged at 9.1%, 6.0%, and 5.0%, respectively. The NBU expects inflation within the announced target band (8% ± 2 pp for 2017, 6% ± 2 pp for 2018 and 5% ± 1 pp for 2019 and thereafter).
An inflation forecast for 2017 was left unchanged due to counterbalancing factors. On one hand, raw food inflation will accelerate at a faster-than-expected pace (by 11.8% yoy), driven by supply-side factors. On the other hand, contribution of administrated prices is forecast to be lower.
In the meantime, the NBU has revised real GDP growth forecast down to 1.6% in 2017 due to worse economic performance in the first half of the year and the downward adjustment of grain harvest estimates. However, real GDP growth is projected to accelerate to 3.2% in 2018 and 4.0% in 2019.
In addition to updated macroeconomic forecasts, NBU representatives presented a range of special topics addressed in the Inflation Report (July 2017):
- Global sunflower oil market conditions:
Ukraine has retained its status as the leading sunflower oil producer and exporter. Therefore, the NBU has analyzed the current market conditions and the outlook for future price developments.
Modern technology has been driving the global aggregate output of sunflower oil up over the recent years. Along with an increase in global sunflower oil production, the global production of palm and soya oils has been steadily growing. Given the oversupply of oil bearing crops in global markets, prices for sunflower oil are expected to remain low.
- Was economic growth driven by investment demand?
Starting from early 2016, the Ukrainian economy has seen a strong rebound in investment demand, which was reflected in a faster growth rate of gross fixed capital formation. The recovery in investment demand has been largely met by imported products. Therefore, it may not have explicitly supported economic growth but laid a solid foundation for future economic growth.
In Q1 2017, investment in machinery and equipment (49% of total investment) as well as investment in buildings and construction (45% of total investment) accounted for the bulk of the increase in investment. In terms of final investment spending, investment in construction became the main driver of domestic economic growth.
- FX cash outside banks: What do recent trends signal?
The decrease in FX cash outside banks recorded since 2015 became the main source of the financial account inflows. Furthermore, in the context of funding constraints due to the loss of access to external financial markets and private debt capital outflows, in 2016, FX cash became the main source of financing the current account deficit.
This structural shift was more pronounced compared to the previous 20-year period of accumulation of FX cash in Ukraine’s economy and significant shocks that have hit the country in the past three years (from Russia's armed aggression and the annexation of a large part of the country’s territory to large-scale economic and banking crises).
Monetary policy implementation by the NBU in the context of a structural liquidity surplus in the banking system
Under conditions of a structural liquidity surplus in the banking system, interest rate management requires the central bank to perform liquidity-absorbing operations to sterilize excess liquidity, while in the case of a structural liquidity deficit, the central bank would have to inject additional liquidity into the market through liquidity-supporting operations. In both cases, the central bank aims to maintain short-term interbank rates within the corridor of interest rates, keeping them at a level close to the key policy rate.
In the situation, where the banking system has surplus liquidity, 14-day NBU`s CD placement operations are the NBU’s main monetary policy operations. The 14-day CD interest rate is equal to the key policy rate. The NBU’s CDs are used as a tool to influence the price of money rather than limit the amount of money. Thus, changes in the key policy rate (14-day CD interest rate) are normally transmitted to interbank interest rates. As a result, short-term rates remain within the corridor of interest rates, indicating the efficiency of the first link of the cause-and-effect chain of the transmission mechanism of monetary policy after the operational framework of monetary policy was redesigned in mid-2015.
The second part of the roundtable discussion was focused on discussing the NBU Board’s proposals to the Monetary Policy Guidelines for 2018 and Medium Term. The NBU Board the considers it necessary to ensure the consistency of inflation-targeting monetary policy and the NBU’s commitment to this policy.
During the discussion, the participants mentioned the major risks to the implementation of monetary policy and outlined its objectives and principles.
The experts actively discussed the NBU’s role in economic recovery, an accurate calculation of the CPI and the interaction with other public authorities, including the State Statistics Service of Ukraine and the Ministry of Finance of Ukraine, further cooperation with the IMF, and shared their vision on the structure and contents of the Monetary Policy Guidelines for 2018.
Follow the discussion on the future path of monetary policy through the NBU’s special website “Debates: The Future Path of Monetary Policy: http://monetary-policy-debates.bank.gov.ua/