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National Bank of Ukraine Leaves the Discount Rate Unchanged

The Board of the National Bank of Ukraine has decided to leave the discount rate unchanged at 22% per annum. The NBU Board’s decision to keep a restrained monetary policy in place will help mitigate mounting risks to price stability triggered by turbulence in the global economy and enable the NBU to achieve its objective of lowering headline inflation to 12% by the end of 2016 and 8% by the end of 2017. 

In the second half of 2015, headline inflation was on a firm downward path. In annual terms, headline inflation moderated to 43.3%, which was broadly in line with NBU projections. Core inflation continued to decline to 34.7% y-o-y.

The subdued domestic demand, NBU’s restrained monetary policy, and stabilization of inflation expectations have contributed to the easing of inflationary pressures in the last months of the year.

The NBU has kept its headline inflation projection unchanged at 12% by the end of 2016 and 8% by the end of 2017. These projections are consistent with the NBU’s medium-term inflation objectives.

The fundamental factors that were at play last year will further support the disinflation trend this year. We primarily refer to subdued aggregate demand. The NBU has revised its 2016 outlook for economic activity downward. Real GDP is expected to grow at 1.1% in 2016. A weaker-than-previously expected economic recovery can be attributed to lower-than-expected global commodity prices, deteriorating global economic growth prospects, and fresh trade restrictions imposed by the Russian Federation, including a ban on the transit of Ukrainian goods through its territory. A further decline in inflation expectations, cancellation of a temporary surcharge on imports, as well as low global energy and food prices, are among the factors supporting the downward trend in inflation.

On the other hand, a sharper decline in inflation will be restrained by further upward adjustments in administrated prices.

The major downside risks to the inflation forecast and consequently the achievement of the NBU’s 2016 inflation objective include external factors that determine the balance of payments and the exchange rate path of the hryvnia. The NBU has already revised its current account deficit forecast upwards to USD 2.5 billion, or 3% of GDP. Should downside risks materialize, this deficit could be higher, which in turn would adversely affect the path of inflation. These downside risks primarily include falling global prices for key Ukrainian export commodities. Second, downside risks may arise from depreciation of the currencies of Ukraine’s trade partner countries.

In view of the high likelihood of these risks to materialise and the NBU’s commitment to its price stability objective, the NBU deems it necessary to maintain the current monetary conditions.

Going forward, provided that inflationary risks subside primarily due to stabilization of the global commodity markets and the disbursement of the next tranches of official financing, the NBU may resume the gradual easing of monetary policy. At the same time, should the aforementioned risks materialize, the NBU will be forced to keep a restrained monetary policy in place for a longer period to achieve its inflation objectives.

The decision on the discount rate is approved by NBU Board Resolution No. 40, dated 28 January 2016, On the Money Market Regulation.

A detailed macroeconomic forecast will be published in the Inflation Report on 4 February 2016.

The next meeting of the NBU Board on monetary policy issues will be held on 3 March 2016 as scheduled.

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