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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 leave the discount rate unchanged at 14% per annum. This decision was prompted by the need to mitigate inflation risks to enable the NBU to meet the inflation targets for 2017-2018.

In October 2016, annual headline inflation stood at 12.4%, which was broadly in line with the NBU forecast. The acceleration of headline inflation was mainly attributed to upward adjustments in administered prices and base effects.

At the same time, the fundamental factors did not exert any inflationary pressure. In October, core inflation remained flat compared to previous month, standing at 6.5% y-o-y. Inflation remained on the projected path, reflecting moderate consumer demand, a high supply of food products due to a high harvest, and prudent monetary policy.

In November 2016, according to the NBU estimates, inflation moderated slightly in line with the projected disinflation path. The further slowdown in annual core inflation contributed to the deceleration of inflation. In addition, price increases for unprocessed foods were moderate due to a higher supply of these food products. Moderate price increases for unprocessed foods offset inflationary pressure from higher fuel prices driven largely by global price developments and the reflection of upward adjustments in administered prices in price statistics.

At the same time, the impact of higher hryvnia exchange rate volatility on inflation was limited in November. The impact of fundamental factors, including a more favorable external price environment for Ukrainian exporters and strong grain exports, was partially offset by heightened political tensions. However, the overall supply of foreign currency in the interbank market exceeded the demand for it. As a result, the NBU mainly purchased foreign currency to replenish international reserves.

Headline inflation is bound to reach the target level of 12% by the end of the year. Also, the inflation targets for 2017 and 2018 (8%+/-2 pp and 6%+/-2 pp respectively) remain within reach.

However, risks for further inflation developments have increased since the previous monetary policy meeting, prompting the NBU to adopt a cautious approach to easing monetary policy to meet the declared targets.

First, the NBU has taken into account the need to buffer the effects from a sharp rise in the minimum wage in 2017. According to the NBU’s estimates, the government’s initiative to raise the minimum wage will have a limited impact on inflation. However, higher households' income will fuel consumption growth, which could add an additional 1 percentage point to headline inflation.

Accordingly, to buffer the effects from a rise in the minimum wage, the NBU has decided to pursue a more restrained monetary policy.

Also, the NBU has taken into account other risks.

First, uncertainty has increased due to heightened political tensions.

Second, there is a high probability that there will be further delays in disbursements of official financing due to the slow pace of implementation of program measures.

Should the risks for price stability abate, the NBU will continue easing monetary policy next year as this move will help reduce borrowing costs and support economic growth.

The decision to keep the key policy rate unchanged at 14% is approved by NBU Board Decision No. 475-рш, dated 8 December 2016, On the Key Policy Rate.

The next meeting of the NBU Board on monetary policy issues will be held on 26 January 2017 according to the schedule approved and published on the NBU’s website.

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