The Board of the National Bank of Ukraine has decided to cut the key policy rate to 13.5% per annum effective 13 December 2019. The NBU speeds up the monetary policy easing, as the rapid appreciation of the hryvnia makes inflationary pressures decline faster than expected.
In November 2019, consumer inflation decreased sharply, reaching 5.1% yoy, which was below the NBU’s latest forecast. In such a way, inflation reached the medium-term target of 5%, set by the NBU in 2015.
The steady disinflation has been driven by a gradual easing of underlying pressures on prices, reflected in a slowdown of core inflation, and by lower energy prices. Inflation slowed markedly due to both the strengthening of the hryvnia and an improvement in inflation expectations. The above factors neutralized the pressure on prices from robust consumer demand and worse harvest of some vegetables.
The hryvnia strengthened due to several reasons. In October–November, the excess supply of foreign currency was mainly driven by proceeds from Ukrainian exports, in particular thanks to a record harvest of grain and oil crops, and selling foreign currency coming from borrowings of state-owned companies. Foreigners continued to invest in hryvnia government bonds, but it did not have major influence on the foreign exchange market, unlike in the past months.
At the same time, the NBU actively purchased excess foreign currency to replenish international reserves. Net foreign exchange interventions have totaled over USD 5.5 billion since the start of 2019.
The inflation forecast will be revised taking into account the FX market conditions
The stronger hryvnia made inflation decline towards the 5% target faster than envisaged in the latest macroeconomic forecast. The NBU will publish the updated macroeconomic forecast, including the inflation forecast, at the end of January.
Reaching the staff-level agreement on the new cooperation program with the International Monetary Fund is an important milestone in the progress of structural reforms in Ukraine as well as in maintaining macrofinancial stability and steady economic growth.
At the same time, other risks that the NBU took into consideration when making its previous monetary policy decision remain in place.
In particular, the risk of rising threats to macrofinancial stability persists because of court rulings and pressure on the NBU. If materialized, these risks could worsen exchange rate and inflation expectations, and make it harder for Ukraine to access the international capital markets at a time when debt repayments are peaking.
The following external risks remain relevant:
- a complete halt of the transit of Russian gas through Ukraine
- intensified trade tensions and more turbulent global financial markets
- an escalation of the military conflict and new trade restrictions introduced by Russia.
Therefore, macroeconomic conditions that are more conducive lower inflation, continued cooperation with the IMF, and the practically unchanged balance of risks have enabled the NBU to ease monetary policy more quickly.
The NBU Board believes that more active cuts in the key policy rate will not prevent it from maintaining inflation close to its 5% target, while at the same time promoting economic growth.
The macroeconomic forecast that the NBU published in October envisages that the key policy rate will be cut further, to 8%
A revised macroeconomic forecast will be made public in January 2020. Among other things, the forecast will take into account the impact of consumer demand and FX market conditions on future inflation.
In addition, the NBU will continue to monitor what progress is achieved in implementing key domestic reforms. These reforms are those that are envisaged in the memorandum of understanding signed by the Ukrainian government and the NBU, and the judicial reform required to establish the rule of law in Ukraine.
The decision to cut the key policy rate to 13.5% was approved by NBU Board Decision No. 925-D On the Key Policy Rate, dated 12 December 2019.
A summary of the discussion by Monetary Policy Committee members that preceded this decision will be published on 23 December 2019.
The next meeting of the NBU Board on monetary policy issues will be held on 30 January 2020 as scheduled.