The Board of the National Bank of Ukraine welcomes the adoption of the Monetary Policy Strategy by the NBU Council, that allows for a consistent continuation of inflation targeting to ensure low and stable inflation as a prerequisite for the stable macroeconomic development of Ukraine.
“The joint vision of the NBU Council and Board on the mid-term monetary policy is key to preserving its consistency and enhancing its predictability, as well as stabilizing inflation expectations and, as a result, ensuring price stability in Ukraine,” emphasized NBU Governor YakivSmolii.
The document is a legal successor to the Monetary Policy Strategy for 2016–2020, that was approved by the NBU Board in August 2015 and laid the foundation for the Monetary Policy Guidelines as approved by the NBU Council in 2016 and 2017. The Monetary Policy Strategy for 2016–2020 provided for the NBU’s transition to inflation targeting as the most effective practice for ensuring price stability.
The new Monetary Policy Strategy reaffirms the key elements of inflation targeting and defines the monetary policy’s main objectives, principles, instruments, and the vectors for their development in the medium term. The specifics of the implementation of the monetary policy’s instruments will be subject to annual review with due attention to the status and risks of the external and internal macroeconomic environment, and approval by the NBU Council in the annual Monetary Policy Guidelines under the Law of Ukraine On the National Bank of Ukraine.
The Monetary Policy Strategy confirms the mid-term inflation target at 5% ± 1 pp to be reached by the end of 2019. Thereafter, the target of 5% will become constant and remain unchanged in the medium term. The NBU will be able to revise it only downwards, and only if the hryvnia exchange rate volatility goes down, relative prices change, and the convergence effects of Ukraine’s economy are reduced to the level of the countries that are Ukraine’s main trading partners.
In certain periods, inflation may deviate from the set target under the influence of the factors that are outside the scope of the NBU’s monetary policy. In particular, these are changes in commodity prices, deviations of administered prices from previously declared levels, etc. However, the NBU will continue to apply monetary policy instruments to bring inflation back to the target within a reasonable policy horizon.
According to the Strategy, the NBU will carry out its monetary policy based on the inflation targeting under the following principles:
- delivery and maintenance of Ukraine’s price stability as a priority
- forward-looking nature of monetary policy decisions, aimed at bringing the inflation to the target value over the medium term of the policy
- application of the key policy rate as the main instrument of the monetary policy
- improvement of the forecasting instruments on an ongoing basis, including, in particular, the analysis of all available data and the use of forecasting models and expert judgements
- maintenance of a floating exchange rate
- NBU’s institutional, financial and operational independence for the proper exercise of its functions
- transparency and accountability of the NBU’s activity with the use of a stable public communication system.
The Monetary Policy Strategy also acknowledges the need for the NBU’s institutional independence. It implies that the NBU must avoid fiscal dominance in any form, including direct and indirect support of budget spending. Such commitment will be one of the main prerequisites for strengthening the trust in the objectives of the monetary policy.