The Board of the National Bank of Ukraine has decided to keep its key policy rate at 17.5% per annum. The decision was required to neutralize inflation risks, which have increased since the previous decision taken in April, and to attain the 5% inflation target next year.
Consumer price inflation has been above the NBU’s forecast for two months running. In April, its annual reading was 8.8% and it continued to accelerate in May, according to NBU estimates. However, the acceleration is mostly driven by temporary factors, which include higher prices for some vegetables and fuel. In H2 2019, the effect of these factors will fade away as the new harvest becomes available for sale and global energy prices go down.
Underlying inflationary pressures continued to decrease gradually. This is reflected in core inflation declining since the start of the year, which is in line with the NBU’s forecast. Inflation expectations have also improved a little.
At the same time, domestic demand continued to increase rapidly. In particular, there was high growth in wages, retail turnover, construction, and industrial production in March-April.
Financial market volatility has also risen in recent weeks. This was due to:
- speculative information about external public debt spread in the media
- deliberations regarding the continuation of IMF financial support put off until a new government is formed
- threats to financial stability continuing to grow due to current court proceedings.
The macroeconomic forecast the NBU published in April envisages that inflation will gradually slow to 6.3% by late 2019, hitting 5.0% in late 2020. The continued fulfillment of Ukraine’s obligations under its cooperation program with the IMF was the basic assumption of the macroeconomic forecast. However, the deliberations regarding further financial support from the IMF and, as a result, related financing have been put off until a new government is formed. This is making the Ukrainian economy more vulnerable, and could increase financial market volatility.
The Board also noted that domestic demand growth could curb the weakening of underlying inflationary pressures
In addition, both external and internal risks remain substantial, as the NBU pointed out when making its previous monetary policy decision. Among other things, uncertainty persists in the country, which is usually the case during an election period.
The following external risks remain relevant:
- global recession and lower raw commodity prices
- persisting geopolitical tensions, particularly due to trade conflicts
- uncertainty over the volume of gas transit through Ukraine starting in 2020, as pipelines bypassing the country are being built to deliver gas to Europe
- the development of the military conflict and new trade restrictions introduced by Russia.
As before, the NBU Board thinks that the monetary easing cycle could continue if inflation risks decrease and inflation expectations improve steadily
The NBU’s updated macroeconomic forecast, which will be published in July 2019, will take into account the possible impact from sustained consumer demand growth on future price movements, stronger volatility on the financial markets, any other potential factors and monetary actions the central bank might have to take to offset these factors.
The decision to keep the key policy rate at 17.5% was approved by NBU Board Policy Rate Decision No.392-D, dated 6 June 2019.
A summary of the discussion by Monetary Policy Committee members that preceded this decision will be published on 17 June 2019.
A new detailed macroeconomic forecast will be published in the Inflation Report on 25 July 2019.
The next meeting of the NBU Board on monetary policy issues will be held on 18 July 2019, as scheduled.