Dear colleagues,
Please be informed that the Board of the National Bank of Ukraine has decided to keep its key policy rate at 7.5% per annum.
At the same time, the NBU is gradually phasing out the use of its anti-crisis monetary tools, which will enhance the impact of previous key policy rate hikes and contribute to lower inflation.
What price developments followed the last monetary policy meeting?
Inflation increased to 9.5% yoy in May, exceeding the NBU’s forecast. This was driven mainly by an increase in prices for some highly volatile components of inflation (particularly the prices of natural gas and sunflower oil), which was largely caused by short-term factors. The last year’s low comparison base remained a pro-inflationary factor as well.
Core inflation also increased in May – primarily on the back of higher prices for sunflower oil and oil-based products. However, the NBU currently observes no signs of underlying inflationary pressures increasing above the forecast.
Although remaining high, inflation expectations of businesses and households have stabilized over past months.
What will be the future path of prices?
Inflation will start to decelerate already in autumn this year and will return to the 5% target in H1 2022. This will be driven by the following factors:
- gradual waning of the low comparison base effect
- new, larger harvest supplies coming to the market
- the stabilizing impact of the NBU’s more restrained monetary policy, including through the exchange rate channel.
What were the other considerations behind today’s decision?
As before, the primary assumption of the NBU Board is that Ukraine will continue to cooperate with the IMF. It will help the Ukrainian economy recover faster from the consequences of the coronavirus crisis.
As before, the spread of the COVID-19 pandemic remains the key risk.
There are other significant risks. They include:
- volatile global capital markets
- a sharp deterioration in the terms of trade and
- an escalation of the military conflict.
Taking into account current circumstances and the balance of risks, the NBU Board has decided to keep the key policy rate at 7.5%. Although inflation is currently higher than the NBU’s forecast, it is too early to take action. First, the central bank takes into account the fact that most pro-inflationary factors are only temporary. Second, monetary policy affects consumer prices with a lag of nine to 18 months, meaning that the NBU should use the key policy rate to respond to higher inflation over the monetary horizon.
At the same time, the central bank has decided to phase out the use of anti-crisis monetary instruments, such as long-term refinancing and interest rate swaps. These instruments supported the banking system and the Ukrainian economy during the crisis. However, with economic activity recovering, they become irrelevant. The phasing out of these instruments will provide the NBU with more control over inflation processes.
What will the NBU’s monetary policy stance be in future?
The NBU is ready to raise its key policy rate further if stronger underlying inflationary pressures and worsening expectations pose a threat to meeting the 5% inflation target in 2022.
The next key policy rate decision will take into account the revised macroeconomic forecast, which will be published in July.
Thank you for your attention!