On May 27-28, 2015, the Monetary Policy Committee of the National Bank of Ukraine (hereinafter – the Committee) held its regular meeting.
The meeting discussed the possible scenarios for future economic and monetary developments and considered the expediency of changing the parameters of monetary instruments.
The Committee members pointed to the sustained positive trends in the money market. In April-May, in particular, the impact that the behavioural factor had on the exchange-rate path was significantly limited, amid the gradual appreciation of the hryvnia. Thus, the official UAH/USD exchange rate fluctuated within the range of UAH 21.4 – 23.5 per USD 1 throughout April, while in May it moved within the range of UAH 20.6 – 20.8 per USD 1.
The public confidence in the banking sector was gradually being restored. In April 2015, the stock of household hryvnia deposits increased by UAH 4.2 billion.
At the same time, consumer inflation accelerated sharply (to 60.9% year-on-year in April). The spike in inflation was driven by increases in utility and natural gas tariffs. The high CPI figure was also attributed to peculiarities of the data collection procedure of the State Statistics Service of Ukraine.
The Committee members pointed out that the National Bank of Ukraine should take a forward-looking approach by using the available instruments to provide an adequate response consistent with the projected inflation path, taking into account inflationary expectations of households and businesses, rather than responding to the current inflation rate. After hitting its peak, inflation is expected to slow down considerably over the next 12 months.
The Committee members present at the meeting noted the monetary policy should focus on restraining the second-round effects of inflationary shocks that had already materialized.
The Committee members raised concerns over the Ukrainian economy sliding into a protracted recession: the annual rate of decline in the index of key sectors output deepened to 23.4% in April 2015. Accordingly, heightened risks remained that the economy would slow down dramatically.
Under such macroeconomic conditions, the shared opinion of the Committee members is that the major contribution that monetary policy can make to the economic recovery is to put the money market, notably its foreign exchange segment, back on track. This microfinancial stabilization will help restore an efficient monetary transmission mechanism and enable the banking system to provide lending to the economy to underpin growth, should the National Bank of Ukraine loosen the monetary policy.
In view of the above, and given the need to put the money market firmly on the path to stabilization, the Committee members concurred in the expediency of keeping the discount rate at 30%.
This level of the discount rate will help ensure a firm downward path of inflation and encourage the return of household deposits to the banking system.
As the risks to the hryvnia stability subside, it raises the prospects of the monetary policy stance being loosened in the near future.