The Board of the National Bank of Ukraine has decided to keep its key policy rate at 7.5% per annum. At the same time, the regulator is gradually phasing out the use of its anti-crisis monetary tools, which will enhance the effect of previous key policy rate hikes and contribute to lower inflation.
In May, inflation accelerated more than forecast by the NBU. This was driven mainly by an increase in prices for some highly volatile consumer basket components, which was caused by short-term factors.
Consumer inflation reached 9.5% yoy in May. The accelerated price growth was mostly related to trends in global commodity markets, particularly the rise in natural gas and sunflower oil prices. The last year’s low comparison base also played an important role.
Core inflation also increased in May, to 6.9% yoy, mostly on the back of higher prices for sunflower oil and oil-based foods. However, currently no signs of an increase in underlying inflationary pressures above the forecast are observed.
Although remaining high, inflation expectations of businesses and households have stabilized over past months.
The NBU expects inflation to slow in autumn thanks to the gradual waning of the low comparison base effect, better harvests, and the stabilizing impact of monetary policy.
Inflationary pressures will remain high in the coming months, mainly due to temporary drivers – particularly supply-side factors and the last year’s low comparison base. However, inflation will start to decelerate already in Q4 2021 and will return to the 5% target in H1 2022.
This will be facilitated by the normalization of global commodity prices and the new, larger harvest coming to the market. The NBU’s more restrained monetary policy should curb inflation expectations and ease the underlying inflationary pressure over the horizon of 9–18 months, including through the exchange rate channel.
As before, the primary assumption of the NBU Board is that Ukraine will continue to cooperate with the IMF.
IMF loans are an important source for financing the state budget deficit and a positive signal for foreign investors. Cooperation with the IMF and other international partners will facilitate a rapid recovery of the Ukrainian economy from the coronavirus crisis.
As before, the spread of the COVID-19 pandemic remains the key risk.
On the one hand, new virus strains and the slow pace of the vaccination campaign pose risks of stricter quarantine restrictions, weaker business activity, and lower consumer and investment demand. This will curb inflation.
On the other hand, the fading away of the pandemic could fuel pent-up consumer demand and speed up the revival of business activity, accelerating consumer price growth.
There are other significant risks. They include:
- volatility on the global capital markets, resulting, among other things, from a marked spike in global inflation and potential rises in risk premiums
- a sharp deterioration in the terms of trade and
- an escalation of the military conflict.
Taking into account the balance of risks, the NBU Board has decided to keep the key policy rate at 7.5%. At the same time, the Board has decided to phase out the use of anti-crisis monetary instruments, such as long-term refinancing and interest rate swaps.
These instruments supported the banking system and the Ukrainian economy during the crisis. However, with economic activity recovering, they become irrelevant. The phasing out of these instruments will provide the NBU with more control over inflation processes.
The NBU is ready to raise its key policy rate further if stronger underlying inflationary pressures and worsening expectations pose a threat to meeting the 5% inflation target in 2022.
The next key policy rate decision will take into account the revised macroeconomic forecast, which will be published in July.
The decision to keep the key policy rate at 7.5% was approved by NBU Board Decision on the key policy rate No. 225, dated 17 June 2021.
A summary of the discussion by Monetary Policy Committee members that preceded the approval of this decision will be published on 29 June 2021.
The next monetary policy meeting of the NBU Board will be held on 22 July 2021, according to the confirmed and published schedule.