Date of the meeting: 5 June 2019
Attendees: eight out of ten members of the Monetary Policy Committee (MPC) of the National Bank of Ukraine:
- Yakiv Smolii - Governor of the National Bank of Ukraine
- Roman Borysenko - Deputy Governor
- Deputy Governor Dmytro Sologub,
- Oleg Churiy - Deputy Governor
- Vitalii Vavryshchuk, Director of the Financial Stability Department
- Sergiy Nikolaychuk - Director, Monetary Policy and Economic Analysis Department
- Yurii Polovniov - Director, Statistics and Reporting Department
- Serhii Ponomarenko - Director, Open Market Operations Department
During the discussion, seven of the MPC members advocated maintaining the key policy rate at the current level (17.5%), while one member proposed to cut the rate by 0.5 pp to 17%.
As the MPC did not touch upon the new macroeconomic forecast, the discussion focused on analyzing inflation risks.
The majority of MPC members pointed to an increase in pro-inflationary risks since the previous decision taken in April. Keeping the key policy rate at the current level will limit the impact of these risks and will help reduce inflation to the target of 5%.
MPC members see the highest domestic risk in a continued increase in consumer demand. An indication of that is retail turnover, which continues to grow at a fast pace.
MPC members admitted that the assumption of slower wage growth underpinning the NBU’s April macroeconomic forecast had not materialized. The pace of growth in real wages remains high and may be an obstacle to the sustained decline in the underlying inflationary pressure.
Consumer lending is also growing steadily. Banks report that demand for consumer loans is beyond their expectations. This is partially explained by the fact that households wish to make up for consumption deferred during the crisis and driven by rising incomes.
Notwithstanding the above, one MPC member argued that the key policy rate should be lowered by 0.5 pp, as the real rate remains sufficiently high and drives an increase in the current account of the balance of payments by influencing the exchange rate. At the same time, monetary policy tools have a limited impact on existing pro-inflationary factors.
Discussing possible changes in the key policy rate, MPC members agreed that the cycle of monetary policy easing might be extended in the event of a sustained decline in underlying inflationary pressures and an improvement in inflation expectations. In particular, this is preconditioned by:
- favorable food markets and lower global energy prices;
- continued gradual improvement in inflation expectations according to surveys;
- a substantial slowdown in the growth of remittances from Ukrainian migrant workers, which reduces the contribution of these incomes to the increase in consumer demand;
- expectations of the IMF financing to be provided this year;
- stronger nominal and real effective exchange rates, which creates the conditions for a decline in underlying inflationary pressures but also puts pressure on the balance of payments.
At the same time, some MPC members were less optimistic about receiving the financing from the IMF soon: particularly, due to the uncertainty about the time of forming the new government and the delay in the preparation of the new state budget. Under this scenario, the financial market might become more volatile in autumn on the back of large repayments on the external public debt. This is evidenced by the recent reaction of the financial market to mass media speculations about the external public debt. External risks also remain important, primarily the risk of a sharp fall in commodity prices following an escalation of trade conflicts across the world.
MPC members had different opinions about the balance of risks that could cause either a deceleration or an acceleration in price growth. That determined different opinions about the time and pace of the decline in the interest rate this year and over the medium term.
The next decision on the key policy rate and its future trajectory will rely on the new macroeconomic forecast to be made in July that will take into account new assumptions about the above inflation factors.
The decision to keep the key policy rate at 17.5% per annum was approved by the NBU Board at the monetary policy meeting held on 6 June 2019.
For reference:
The Monetary Policy Committee (MPC) is the NBU’s advisory body that was 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.