The National Bank of Ukraine has kept its year-end headline inflation forecast unchanged at 12% for 2016, 8% for 2017, and 6% for 2018. Such inflation projections are consistent with the NBU’s monetary policy objectives according to the October 2016 Inflation Report.
Although inflation has remained in single-digit territory for the sixth month in a row in September, it is set to accelerate to 12% by the end of the year, driven by upward adjustments in administered prices and tariffs.
In 2017-2018, the following factors will keep headline inflation on a downward trend:
- First, inflation on administered prices is expected to be lower due to a deceleration in utility price growth.
- Second, core inflation, a measure of fundamental price trends, will remain relatively low. In particular, imported inflation will continue to slow down due to the low volatility of the hryvnia exchange rate and a further decrease in inflation expectations.
- Third, raw food prices will be pushed down by supply-side factors amid a high harvest. However, the supply-side effects (reorientation of trade flows from other countries due to trade restrictions imposed by Russia, as well as challenges faced by Ukrainian exporters exporting food commodities to Middle East countries) that dampened the raw food price increase earlier this year are fading out. At the same time, the increase in global food prices will contribute to a slight acceleration of raw food inflation.
Realization of supply-side shocks during the forecast horizon may cause actual inflation to deviate from the target path. Due to the suspension of state price regulation for select socially sensitive products, administered prices may shoot beyond estimations. In turn, actual inflation may come in below projections due to positive shocks, such as more favorable external conditions (a rise in world commodity prices, stronger foreign demand for Ukrainian goods) and a faster pace of reforms.
At the same time, a recent government initiative to raise the minimum wage more than twofold from the current level gives an important uncertainty to the forecast.
The forecast for real GDP growth in 2016 remained unchanged at 1.1%. In the medium-term, the economy will grow at slightly lower rates than we predicted earlier: currently 2.5% in 2017 and 3.5% in 2018.
The forecast revision for the next two years reflects the less favorable external environment for Ukrainian exporters as compared with the assumptions underlying the previous forecast. Grain prices will remain low in the 2016-17 marketing year due to this year’s record global harvest. Steel prices are unlikely to show a strong rebound due to a steel supply glut on global markets.
Investments will remain the main driver of economic growth in the period ahead. Private consumption is expected to recover at a moderate pace in 2017-2018 owing to realization of deferred demand and growing household income. A revival of lending activity against the backdrop of falling interest rates in the economy will become an additional factor for increasing domestic demand.
The current account deficit has been revised upward to USD 2.5 billion in 2016, USD 2.9 billion in 2017, and USD 2.8 billion in 2018.
The current account deficit forecast was worsened due to less favorable terms of trade and a more rapid recovery of investment demand.
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.