The NBU Board has decided to keep its key policy rate at 6% per annum. Maintaining a loose monetary policy will support economic recovery amid moderate inflation and elevated uncertainty over how the pandemic is going to spread in Ukraine and the world.
In July–August, inflation was below the target range of 5% ± 1 pp. The dynamics of core inflation were subdued. The revival in consumer demand and the rise in fuel and natural gas prices in line with global market trends were offset by seasonal adjustments in raw food prices.
Future movements in inflation will depend on how fast the economy recovers.
Data on imports, the retail trade, and household expenditures on domestic tourism, real estate, and cars indicate a further recovery in consumer demand, which is likely to continue in the coming months. The NBU’s monetary policy easing cycle and the government’s fiscal stimulus, including changes in social standards, will support this trend.
At the same time, energy prices will continue to increase as the global economy gradually recovers from the coronavirus crisis. The statistical effect of the low comparison base formed in the final months of last year will make a significant contribution to the overall rate of inflation. All of this paves the way for inflation to enter the target range by the end of the year.
The primary assumption behind the NBU Board’s decisions remains that Ukraine will continue to cooperate with the IMF.
This cooperation is important not only in terms of financing the state budget deficit, but also from the perspective of receiving support from other international partners and investors. Funds from these sources will go to finance anti-coronavirus measures and infrastructure projects, which will help jump-start the still weak investment activity.
As before, a longer-lasting coronavirus pandemic, the further spread of the disease and stricter quarantine measures remain the key risks to macrofinancial stability.
The increase in the number of coronavirus cases in Ukraine seen in recent months has not affected the pace of economic recovery. Nevertheless, a new wave of COVID-19 could restrain consumer demand and slow the recovery in domestic-market-oriented sectors, especially the services sector.
Other risks also remain significant. They include:
- the negative impact of certain court rulings on macrofinancial stability
- an escalation of the military conflict in eastern Ukraine or on the country’s borders
- the higher volatility of global food prices, driven by global climate change and the risk of stronger protectionist measures.
Given the above balance of risks and the steady trend towards a recovery in consumer demand, the NBU Board kept the key policy rate unchanged, at 6%.
The fact that the key policy rate is being kept below its neutral level shows that monetary policy is expansionary. The policy also leaves enough room for further interest rate cuts in the economy.
Previous key policy rate cuts are continuing to be transmitted to market rates. More specifically, interest rates on hryvnia domestic government debt securities and hryvnia deposits are at record lows. Loan rates are also continuing to fall.
The NBU has also intensified its regulatory activities in order to promote lending, as well as activities aimed at reducing the share of nonperforming loans in the banking system. This will bolster the downward trend in interest rates on corporate and household loans.
The NBU’s future monetary policy will mainly depend on how the COVID-19 pandemic develops.
Under current circumstances, the key policy rate of 6% is aimed at keeping the balance between maintaining moderate inflation and stimulating the economy. However, if the adverse impact of the coronavirus pandemic on domestic demand and business activity increases, the NBU will be ready to give the economy additional impetus for growth. Conversely, the NBU could also deploy monetary policy tools to respond to the likely increase in inflation risks in 2021.
The decision to keep the key policy rate at 6% was approved by NBU Board Decision No. 559-D on the key policy rate, dated 3 September 2020.
A summary of the discussion by Monetary Policy Committee members that preceded the approval of this decision will be published on 14 September 2020.
The next monetary policy meeting of the NBU Board will be held on 22 October 2020, according to the confirmed and published schedule.