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NBU Keeps Its Key Policy Rate on hold at 17%

The Board of the National Bank of Ukraine has decided to keep its key policy rate at 17.0%. The current monetary conditions are sufficiently tight to bring inflation to its medium-term target.

Inflation continued to decline in April–May 2018, as projected by the NBU.

According to the State Statistics Service of Ukraine, headline inflation decelerated to 13.1% yoy last month. This was a minor deviation from the NBU’s latest forecast, caused by the most volatile components and likely to vanish in the coming months. In line with the NBU’s preliminary estimates, inflation is expected to decrease markedly in May, reflecting both statistical base effect and a significant drop in food prices.

The NBU’s tight monetary policy continued to contain the underlying inflationary pressure. Thisin the core inflation measure that remained unchanged in April, at 9.4%, and was in line with the NBU’s projections.

The effect of the tight monetary policy has mostly been seen in the exchange rate channel, with the hryvnia having strengthened since the end of January 2018. There are signs of some improvement in inflation expectations as well. Headline inflation will continue to decrease gradually according to the NBU’s forecast published in the April 2018 Inflation Report. It will reach 8.9% as of the end of 2018 and will return to its target range in mid-2019. This will be further driven by the monetary conditions, which are already sufficiently tight.

At the same time, this forecast will remain relevant only if its key assumption materializes, which is the sustained progress in structural reforms, particularly under the IMF’s Extended Fund Facility.

These reforms are critical for both maintaining the macrofinancial stability and ensuring the long-term economic growth in Ukraine. The near future will be crucial for taking decisions that are important for extending cooperation with Ukraine’s official lenders. The need for this cooperation has become stronger as developing countries’ access to the global capital market is narrowing.  Borrowing costs are rising for these countries amid the US dollar appreciation, increased geopolitical tensions, and risks of trade wars.

The NBU Board believes that, conditional on the materialization of baseline scenario assumptions the current monetary stance is tight enough to reduce inflation over the medium term. In this light, the NBU Board has decided to keep its key policy rate at 17.0%.

Alongside, if risks to lower inflation and macrofinancial stability rise, including due to a lack of progress in structural reforms and access to official financing, the NBU may hike the key policy rate to the level sufficient to drive inflation back to the established medium-term targets.

The decision to maintain the key policy rate at 17.0% is approved by NBU Board Decision No. 287-D On the Key Policy Rate dated 24 May 2018.

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

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