The regular meeting of the Monetary Policy Committee of the National Bank of Ukraine (hereinafter – the Committee) was held on June 24 – 25, 2015.
The meeting discussed possible changes in the parameters of monetary instruments given the outlook for the economy and future developments in the money market.
The Committee members adopted decisions on the following:
to keep the discount rate at 30%.
The Committee members pointed to somewhat lower inflationary risks, despite the continued high rate of inflation. Consumer Price Index (CPI) growth stood at 58.4% yoy in May. (Annual CPI inflation has declined from 60.9% in April).
The strengthening of the hryvnia exchange rate against the U.S. dollar since April and the narrowing of the exchange rate fluctuation range have contributed to containing price growth.
The improvement of the situation in the forex market and stabilization of expectations have encouraged the return of deposits to the banking system. Since the beginning of June, domestic currency deposits have increased by 1.9%.
Given the stability in the money market and weak aggregate demand, the Committee expects inflation to continue decelerating in the coming months.
With a view to consolidating the positive developments in the money market and anchoring expectations, the Committee members recommended keeping the discount rate unchanged and shifting to loosening the monetary policy stance should inflationary risks subside further;
to streamline approaches to carrying out liquidity sterilization operations.
The Committee deems it expedient to streamline the existing practice of carrying out liquidity-absorbing operations to sterilize excess liquidity in the banking system, inter alia, through:
the placement of certificates of deposit with a maturity of 1 up to 3 months, with the interest rate thereon being set through limited-amount interest-rate tenders;
sales of government bonds from the portfolio of the National Bank.
The aim of these changes is to strengthen the role of market-based factors in influencing the functioning of the money market through the deployment of efficient price-setting mechanisms and by enabling to form a yield-to-maturity curve, reviving the secondary market of government bonds, and providing banks with additional instruments designed to diversify their asset-side operations;
to approve the Inflation Report, including its section containing inflation projections, and endorse its publication.
The macroeconomic forecast for 2015-2016 is based on assumptions of a sustainable ceasefire, the gradual recovery of businesses in Donetsk and Luhansk regions and that the benefits of currency depreciation will feed through to the increased price competiveness. Another important assumption is that Ukraine will continue its cooperation with the International Monetary Fund and remain on track with fulfilling its commitments under the Extended Fund Facility arrangement, including commitments to undertake financial and energy sector reforms, fiscal and general economic reforms, which coupled with a successful restructuring of external sovereign debt will have a positive effect on economic recovery.
According to the NBU's estimates, economic growth is expected to recover in Q3 2015 (compared with the previous quarters), driven primarily by net export growth and the utilization of spare capacity. Overall, GDP is projected to fall by 9.5% in 2015. Real GDP is projected to rebound in 2016, growing at an annualized rate of 3%.
The burst of depreciation in February-March caused CPI inflation to accelerate significantly. In the January through May period, the consumer price index rose by 40.1%, whereas in annualized terms, CPI inflation accelerated from 24.9% in December to 58.4% in May. Inflation accelerated at the fastest pace in March and April, reflecting the impact of the pass-through of the deepest currency depreciation in late February and increases in utility tariffs. These factors contributed to the decision to revise the forecast for headline inflation upwards to 48% for this year-end (core inflation was revised upwards to 36%). This revision reflects price increases in the previous months rather than downbeat expectations – over the next months, inflation is projected to steadily drift down – to 12% at the end of 2016. Inflation will slow down, reflecting the fading impact of the pass-through of currency depreciation, falling global prices, below-potential economic activity, and tight and fiscal monetary policy.
The full version of the Inflation Report will be published on the NBU's official website on July 2, 2015.