Date of the meeting: 11 December 2019.
Attendees: ten out of ten members of the NBU Monetary Policy Committee (MPC):
- Yakiv Smolii - Governor of the National Bank of Ukraine
- Kateryna Rozhkova - First Deputy Governor
- Roman Borysenko - Deputy Governor
- Dmytro Sologub - Deputy Governor
- Sergii Kholod - Deputy Governor
- Oleg Churiy - Deputy Governor
- Vitalii Vavryshchuk – Director of the Financial Stability Department
- Volodymyr Lepushynskyi - Director of the Monetary Policy and Economic Analysis Department
- Yurii Polovniov - Director of the Statistics and Reporting Department
- Serhii Ponomarenko - Director of the Open Market Operations Department.
During the discussion, all members of the MPC unanimously spoke in favor of a more significant easing of monetary policy in December 2019 than predicted by the projected trajectory of the key policy rate (published in the October 2019 Inflation Report).
An accelerated reduction in the key policy rate is a possibility, as inflationary pressures have eased more rapidly than previously projected. The November slowdown in consumer inflation to 5.1% means that the NBU reached its medium-term inflation target of 5 ± 1% a few months earlier than it predicted in its macroeconomic forecast.
A key policy rate cut is also warranted by continued favorable conditions in the FX market. Specifically, the changes in inflationary dynamics were primarily driven by the hryvnia’s strengthening amid growing export earnings and steady inflows of foreign capital. The effect of the exchange rate pass-through to inflation proved to be stronger and occurred with a shorter lag than the NBU projected, several MPC members suggested.
The stronger hryvnia, coupled with lower global energy prices and an expanded supply of certain foods, contributed to the deceleration in price growth.
Favorable FX market conditions and the sequence of actions the NBU took to promote macroeconomic stability helped improve inflation expectations, the MPC members pointed out. In particular, financial analysts’ expectations are already close to the inflation target (5 ± 1%).
The monetary policy easing will support economic growth without preventing inflation from stabilizing at approximately 5%, the MPC members estimated. By contrast, continuing to maintain tight monetary conditions may result in the hryvnia becoming excessively strong, which would lead to economic imbalances.
At the same time, the MPC members differed on the magnitude of the key policy rate cut.
Six of the MPC members offered to cut the key policy rate by 150 bp to 14.0%. Not only will a cut that size support economic growth, but also it will contribute to reducing the cost of hryvnia loans, the MPC members opined. However, underlying inflationary pressures from rising consumer demand and labor costs persist, the MPC members emphasized. Another risk that was brought up during the MPC meeting was the growth in global prices for certain foods. This price growth may eventually impede the improvement in inflation expectations. The quantifiable impact of these factors on inflation developments over the monetary policy horizon will be estimated during the regular update of the NBU’s macroeconomic projections in January 2020.
Threats to macrofinancial stability may intensify as a result of court rulings and unrelenting pressure on the NBU, several MPC members emphasized. Despite the considerable progress of the IMF negotiations, specifically the agreements the experts on either side have been able to reach with regard to the program, uncertainty remains over the speed of the implementation of the requirements Ukraine must meet before the IMF Board can green-light the program.
In terms of raising confidence in the NBU’s monetary policy, a situation where inflation is below the target range is more acceptable than when it exceeds it, the MPC members pointed out. During almost three years, inflation has remained above the upper bound of the target range, and this still affects inflation expectations and confidence in the performance of the NBU’s monetary policy.
According to one of the MPC members, who spoke with confidence, cutting the key policy rate by 150 bp is sufficient, as the economy will also be stimulated by the next steps in currency liberalization and by setting the reserve requirement rate for hryvnia deposits to zero while increasing this rate for FX deposits.
Four of the MPC members advocated cutting the key policy rate by a more radical 200 bp, to 13.5%.
They stressed the need for a more aggressive response to lower inflationary pressures and the long-term strengthening of the hryvnia. What also justifies the bigger cut is that a faster monetary policy easing will outweigh the risks of inflation falling below the target range, the four MPC members said.
The deeper key policy rate cut will also speed up the reduction in the cost of credit resources in the economy and help economic growth.
The decision to set the key policy rate at 13.5% per annum was approved by the NBU Board at the monetary policy meeting held on 12 December 2019.
For reference:
The Monetary Policy Committee (MPC) is the NBU’s advisory body created to share information and opinions on monetary policy formulation and implementation in order to deliver price stability. The MPC comprises the NBU Governor, other NBU Board members, and directors of the Monetary Policy and Economic Analysis, Open Market Operations, Financial Stability, and Statistics and Reporting Departments. The MPC meets the day before the NBU Board meeting on monetary policy issues. Decisions on monetary policy issues are made by the NBU Board.