The Board of the National Bank of Ukraine has decided to cut the key policy rate to 10% per annum effective 13 March 2020. The NBU continues its monetary policy easing, as predicted, in order to bring inflation back to its target range of 5% +/- 1 pp and to support economic growth in Ukraine amid a cooling global economy.
The first months of the year show that inflationary pressures are waning faster than the NBU expected
In January–February, consumer inflation declined faster than foreseen in the forecast trajectory (reaching 3.2% yoy in January and 2.4% in February), remaining below the target range of 5% +/- 1 pp. Core inflation was also lower than forecast during this period.
The faster disinflation was driven by the sustained effects of the last year’s hryvnia appreciation on prices of goods, large supplies of the majority of raw foods, and lower energy prices. These factors offset the effect of robust consumer demand, which was bolstered by the continued growth in real household income.
In January the NBU forecast inflation at 4.8% as of the end of 2020, but this forecast may be reviewed in April depending on further developments
So far, the global spread of the novel coronavirus has had a limited or neutral impact on the economy of Ukraine. Ukraine’s exports continue to rise. Further increases in physical volumes of exports have more than offset certain declines in prices for some of the goods the country exports. At the same time, import prices (especially energy prices) are declining even faster than export prices.
Uncertainty over the spread of the novel coronavirus, and stronger turbulence on financial and commodity markets saw the Ukrainian FX market respond with deteriorated sentiment and increased nervousness.
However, the following consequences of the spread of the coronavirus have not yet impacted the economic activity and inflation in Ukraine:
- the downward pressure on prices and cooling of the global economy
- monetary policy easing by central banks of the leading economies and Ukraine’s trading partners in response to these processes
- measures taken by governments to prevent the spread of COVID-19.
Apart from the drop in global prices caused by the coronavirus, disinflation in Ukraine will be driven by the recent rise in competition between crude oil producers. This will keep energy prices at record lows, which will also impact prices for Ukrainian exports.
Overall, the effect of all these factors on economic growth and inflation in Ukraine will be mixed, adding to the uncertainty.
The NBU Board relied on the key assumption that cooperation with the IMF continues
Signing a new agreement with the IMF will make the Ukrainian economy less vulnerable in a time of turbulent global markets and during a period of heavy public debt repayments. Investors’ perception of Ukraine will also depend on Ukrainian court rulings on the responsibility and liabilities to the state of the former owners of insolvent banks.
The risk arising from the global spread of the novel coronavirus could, if realized, drive the global economy into a recession and cause a significant slowdown in the Ukrainian economy. A dramatic decline in global demand and investors’ revaluation of risks related to developing economies could negatively affect Ukraine's external trade and make it more difficult for Ukraine to obtain financing.
There are other significant risks. They include:
- an escalation of the military conflict in eastern Ukraine and new trade restrictions being introduced by Russia
- a drop in the harvest of grain, fruit and vegetable crops in Ukraine in the wake of unfavorable weather
- the higher volatility of global food prices, driven by global climate change
Therefore, the NBU Board made its key policy rate decision when inflationary pressures were decreasing faster than expected, and the economy needed further support.
In view of the above, the NBU Board continued its monetary policy easing cycle by cutting the key policy rate by 1 pp, to 10%, as envisaged by the central bank’s January forecast. This will give the required impetus to the economy.
As before, the NBU plans to decrease its key policy rate to 7% by the end of the current year
In deciding on the pace of key policy rate cuts to that level, the NBU will closely monitor:
- the spread of the coronavirus around the world and in Ukraine, and its impact on the domestic and global economy
- the response of governments and central banks to these developments
- any progress achieved in negotiating a new aid agreement with the IMF, which will shape the expectations of financial market participants, and determine the prices of Ukrainian assets.
If there are favorable developments, and if the new Ukrainian government speeds up reform, the NBU will be able to ease its monetary policy more quickly.
Conversely, if the above risks materialize, the NBU will respond quickly by deploying the monetary policy tools it has at its disposal.
The decision to cut the key policy rate to 10% was approved by NBU Board Decision No.172-D On the Key Policy Rate, dated 12 March 2020.
A summary of the discussion by Monetary Policy Committee members that preceded this decision will be published on 23 March 2020.
The next meeting of the NBU Board on monetary policy issues will be held on 23 April 2020 as scheduled.