Date of the meeting: 4 September 2019.
Attendees: eight 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
- Oleg Churiy - Deputy Governor
- Vitalii Vavryshchuk – Director of the Financial Stability Department
- Sergiy Nikolaychuk - Director of the Monetary Policy and Economic Analysis Department
- Serhii Ponomarenko - Director of the Open Market Operations Department.
During the discussion, all of the MPC members advocated lowering the key policy rate in September. Seven members offered to cut the rate by 0.5 pp, to 16.5%, while one member suggested cutting it by 1 pp, to 16.0%.
As before, the MPC members expect that inflation will continue to decline to the 5% target.
The key policy rate discussion has become more structured, and the communication of arguments has become more convenient due to the previous publication of the key policy rate forecast in July, the MPC members pointed out. In arguing their point, the MPC members should now identify factors and risks that may shift the projected inflation trajectory – and thus the key policy rate – away from the baseline scenario of NBU’s macroeconomic forecast (July 2019 Inflation Report).
The macroeconomic factors seen since the last MPC meeting have balanced each other out without affecting the NBU’s inflation projections, the MPC members said.
The rapid growth in real wages and the steady increase in consumption continue to exert significant inflationary pressures on the economy. Consumer sentiment has risen to record levels. The growth in real wages and consumer demand is showing no clear signs of decelerating.
On the other hand, the stronger hryvnia and declining oil and gas prices may have a greater disinflationary effect than the NBU projected in its macroeconomic forecast in July.
Households’ inflation and depreciation expectations may gradually improve, as domestic political risks have subsided since the election cycle ended and the new government took office and resumed talks with the IMF about a new cooperation program. However, the NBU’s baseline macroeconomic scenario primarily relies on the assumption that the IMF cooperation will continue, and so its resumption alone cannot justify a bigger rate cut than the projected trajectory of the key policy rate envisages.
Considering that risks to the inflation forecast are balanced, seven MPC members spoke in favor of continuing the cycle of monetary policy easing in September and reducing the key policy rate by 50 bp, in line with the projected trajectory. The NBU’s monetary policy should continue to be prudent and consistent, the MPC members said. This is the main prerequisite for raising public confidence that the NBU’s monetary policy pursues price stability. It also lays a stronger foundation for a sustained reduction in loan rates than would a more aggressive easing of monetary policy aimed at producing short-term positive effects.
The NBU has previously said it may make deeper cuts to the key policy rate if nonresident demand for hryvnia-denominated domestic government bonds continues to strengthen, one MPC member pointed out. In recent weeks, however, the inflow of nonresident funds into government securities has stopped. Nonresidents have neither increased their portfolios nor moved their investments out of Ukraine. They have rather preferred to invest repayments on short-term securities into other, longer-term issues of domestic government bonds.
One MPC member supported a more aggressive reduction of the key policy rate (by 1 pp). This would be a logical step to take, given that global trade conflicts persist, the MPC member said. Trade wars have prompted central banks in developed countries to ease their monetary policies and created opportunities for a more rapid easing of monetary policies in emerging markets, including Ukraine.
The MPC members also discussed factors that may affect the projected trajectory of the key policy rate and that are to be taken into account in October, when the NBU will be making a regular revision of its macroeconomic forecast. The implementation of the economic and legislative initiatives declared by the new government may help improve the investment climate and the economy and thus increase the potential for GDP growth, some of the MPC members said. Under a more optimistic scenario than it projected in its July forecast, the NBU may accelerate the monetary policy easing before this year is over. However, the above will be primarily reflected in deeper key policy rate cuts that are scheduled to take place in 2020.
At the same time, with consumer demand being robust and wages growing faster than labor productivity in Ukraine, risks of strong inflationary pressures remain, the MPC members pointed out. Monetary policy instruments should counterbalance these inflationary factors. Should the risks of continued inflationary pressures materialize, the NBU will reduce the key policy rate more slowly.
The decision to set the key policy rate at 16.5% per annum was approved by the NBU Board at the monetary policy meeting held on 5 September 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.