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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 prudent monetary policy in place aims to stave off any adverse impacts that domestic political instability and global economic turbulence could have on the Ukrainian economy. The decision to keep interest rates unchanged is consistent with the NBU’s objective of lowering headline inflation to 12% by the end of 2016 and 8% by the end of 2017.

In January 2016, headline inflation stood at 0.9% m-o-m and was broadly in line with the NBU’s inflation projections for the month. January's price developments were consistent with the projected disinflation path, envisaging moderation of headline annual inflation to 12% by the end of 2016. Core inflation continued to moderate, standing at zero in January. According to preliminary estimates of the State Statistical Service based on a ten-day monitoring of price developments, annual headline inflation remained low in February 2016.

In recent months, inflationary pressures have been dampened by the NBU’s commitment to prudent monetary policy and subdued domestic demand.  

The heightened exchange rate volatility observed in January-February 2016 had a relatively limited impact on the inflation rate. Thanks to the measures taken by the NBU to smooth excessive exchange rate volatility, the hryvnia depreciated in a gradual manner, thus having a limited impact on the inflation rate.

The NBU deems it appropriate to keep its headline inflation projection unchanged at 12% by end-2016 and 8% by end-2017.   Accordingly, the NBU confirms that its pre-announced mid-term inflation targets remain within reach.

Sluggish economic growth, which will continue to weigh on consumer demand, is one of the key factors that will keep inflation firmly on a downward trend in 2016. Low global prices for energy and food are among other factors supporting the downward trend in inflation.

At the same time, a sharper decline in inflation will be restrained by the planned upward adjustment of administered prices, which is already reflected in the NBU’s inflation forecast.  

The major downside risks to the inflation forecast and, consequently, the achievement of the NBU’s 2016 inflation objective include both external and domestic factors that determine the balance of payments performance, the exchange rate path of the hryvnia, and inflation expectations. While the global markets see tentative signs of stabilizing for prices for key Ukrainian export commodities, other risks are growing.  First, it takes a longer time for exporters to shift their focus to new sales markets and find new transport routes for the delivery of their goods. Second, Ukraine faces risks stemming from domestic political turbulence, delays with the resumption of cooperation with the International Monetary Fund, and, consequently, further delays to disbursements of official financing.

In view of the abovementioned risks 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, the NBU intends to resume the gradual easing of monetary policy. This can primarily be achieved provided that political stability is restored in the country, Ukraine brings the IMF program back on track, and as long as there are more favorable external conditions for domestic exports. At the same time, should these risks materialize, the NBU will be forced to keep a prudent 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. 135, dated 3 March 2016, On Money Market Regulation.

The next meeting of the NBU Board on monetary policy issues will be held on 21 April 2016, as scheduled.

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