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The National Bank of Ukraine Leaves the Key Policy Rate Unchanged

The Board of the National Bank of Ukraine has decided to maintain its key policy rate at 14% per annum. This decision was prompted by the need to mitigate risks for the achievement of inflation targets in 2017-2018.

In January 2017, inflation accelerated to 12.6% yoy, which was in line with the NBU forecast published in the Inflation Report (January 2017). The slight acceleration of annual inflation was driven by higher production costs, in particular labor costs, rising global commodity prices, including oil and food prices, and the weakening of the hryvnia in late 2016 and early January 2017.

It is expected that inflation will accelerate further in annual terms in February 2017, primarily due to base effects.

Higher global prices for key Ukrainian export commodities along with a gradual rise in FX proceeds from exports helped stabilize the situation in the FX market in the second half of February. Furthermore, in contrast to January, when the NBU mostly sold foreign currency to smooth excessive exchange rate fluctuations, in February the situation reversed. As a result, the NBU has remained a net buyer of foreign currency since the beginning of the year.

Ukraine’s economy keeps recovering, driven inter alia by favorable external environment and high investment demand. This was evidenced by a further rise of the Index of Key Sectors Output (IKSO).

In its turn, a pick-up in economic activity continued to spur labor demand. In January, real wages rose by 21.4% yoy, underpinned by strong labor demand and an increase in the minimum wage. As expected, the growth of real wages could renew demand-pull pressures on prices.

The NBU considers that the inflation targets for 2017 and 2018 (8%+/-2 ppts and 6%+/-2 ppts, respectively) remain within reach.

Annual inflation is projected to remain high in the first three quarters due to statistical base effect. It will return to single-digit level only in Q4 2017.

The projected demand-pull pressure on prices will be contained by the NBU’s prudent monetary policy.

However, the risks to further inflation developments have increased since the previous monetary policy meeting, prompting the NBU to continue a pause in its monetary policy easing cycle.

First of all, the major risks include intensification in hostilities and a transport blockade in the east of Ukraine. If lasted for a prolonged period, these developments will lead to the ultimate disruption of production and supply chains and, thus, to a reduction in steel and coke output, as well as mining and electricity production.

Implicitly, this poses risks to the inflation forecast through a negative impact on the balance of payment. A possible contraction in metallurgical exports and higher coal imports could adversely affect the current account balance. Consequently, this will have negative implications for the interbank FX market. Moreover, as a side effect of these developments, inflation expectations may worsen.

Given the aforementioned risks and the need to achieve the inflation targets, the NBU Board decided to retain its policy rate unchanged at 14%. 

Further  key policy rate path will depend on the materialization of the aforementioned risks to price stability and the development of inflation expectations.

The decision to keep the key policy rate at 14% is approved by NBU Board Decision No. 110–D On the Key Policy Rate as of 2 March 2017.

The next NBU Board meeting on monetary policy issues will be held on 13 April 2017 as scheduled.

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