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NBU Raises the Key Policy Rate to 17% Per Annum

NBU Raises the Key Policy Rate to 17% Per Annum

The Board of the National Bank of Ukraine has decided to hike its key policy rate to 17% per annum, effective from 2 March 2018.The fourth consecutive increase in the key police rate is reasonable as inflation risks do not tend to subside. The hike is aimed at lowering headline inflation to meet the target over the medium term.

In January 2018, headline inflation accelerated to 14.1% yoy, exceeding the NBU forecast published in the January Inflation Report. According to preliminary estimates, inflation rate remained high in February. This was primarily due to the faster-than-expected growth in prices for food products and services. Faster growth in fuel prices due to a substantial increase in global oil prices and hryvnia depreciation in the past months contributed as well. In January, core inflation accelerated to 9.8% yoy. This was driven by a number of factors: higher production costs amid further rapid wage growth, hryvnia depreciation over several previous months, and accelerated consumer demand.

Monetary policy tightening conducted by the NBU since October 2017 curbed the buildup in inflationary pressure. As expected, higher key policy rate has stimulated growth in bank interest rates and made hryvnia financial instruments more attractive. In particular, this has boosted foreign capital inflows into hryvnia-denominated government securities. It is worth mentioning that short-term capital inflows might, under certain conditions, be quite volatile and pose risks to the external sustainability of the economy. However, the NBU currently assesses these risks as low.

An inflow of foreign capital, together with an increase in exporters’ foreign currency earnings amid benign global environment favorably affected the supply on interbank FX market. This strengthened the exchange rate of the hryvnia to the US dollar.

However, the strengthening of hryvnia against US dollar took place in parallel with the weakening of the latter on the international foreign exchange market. Therefore, the overall movements in the hryvnia exchange rate against the currencies of Ukraine’s main trading partners arenot yet conducive to a faster drop in inflation.

The NBU believes that the January forecast that inflation will retreat to 8.9% in 2018 and will return to the target in mid-2019 remains relevant.

At the same time, the inflation risks the NBU considered when making its policy decision in January still persist. These include:

  • high vulnerability of the Ukrainian economy as the next tranche under the EFF program with the IMF is further postponed
  • high inflation expectations of economic agents
  • the rapid growth in consumer demand.

When making its last policy decision, the NBU Board said that if there were no clear signs of lowering inflation pressure in the near future, the central bank might tighten its monetary policy further in order to bring inflation back to its mid-term target.

In view of the need to offset the influence of these risks and to curb inflation, the NBU has decided to increase the key policy rate to 17% per annum.

As a result, the NBU believes that after several policy rate increases, which began in October 2017, the current monetary conditions are sufficiently tight to bring inflation back to its mid-term target, as projected in the January 2018 Inflation Report.

However, if fundamental inflation risks increase further, the NBU may resort to further key rate hikes. The next key rate decision, which will be taken in April 2018, will factor in new macroeconomic projections, inflation projections in particular.

The NBU Board is convinced that achieving price stability is a precondition for sustainable economic growth. In particular, an improvement in inflation expectations is the main driver for loan interest rates to decrease in the mid-term.

The decision to raise the key policy rate to 17% has been approved by NBU Board Key Policy Rate Decision No. 133-D, dated 1 March 2018.

The next meeting of the NBU Board on monetary policy issues will be held on 12 April 2018 as scheduled.

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