Dear colleagues, I would like to inform you that the NBU Board has decided to raise the key policy rate to 8.5% per annum. In addition, the NBU will stop applying its anti-crisis monetary measures at the start of Q4 2021.
These decisions will help rein in inflation expectations and change the trajectory of inflation toward a decline in order to bring it back to the 5% target in 2022.
What price dynamics followed the previous NBU Board meeting on monetary policy issues?
In July 2021, consumer prices grew by 10.2% yoy, which was in line with the NBU’s latest macroeconomic forecast. Inflation continued to accelerate in August, according to the NBU’s preliminary estimates.
Sustained high global prices for energy and food made a large contribution to the price dynamics. Unfavorable weather also impacted prices of some food products.
Underlying inflationary pressures have also been persisting. In particular, the rapid growth in real household income supported strong domestic demand. Furthermore, inflation expectations remain high. There is also a risk that they will keep de-anchoring.
At the same time, core inflation has stabilized over last months, underpinned by the hryvnia appreciation on the back of benign external environment and the NBU’s prudent monetary policy. A correction of sunflower oil prices also restrained core inflation.
How will prices change further on?
Inflation will slow to a single-digit level at the end of 2021 and will gradually return to its 5% target in 2022. This will be driven by several factors:
- first, the waning effect of the last year’s low comparison base
- second, a correction of global commodity prices
- and, third, monetary policy tightening by the NBU.
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.
Ukraine must continue to cooperate with the IMF under the stand-by program in order to maintain its macrofinancial stability in the years ahead, among other things. The implementation of the IMF program will also ensure access to official funding from other sources, contribute to lower interest rates on external borrowing, and support foreign investors’ appetite for hryvnia assets.
At this time, major risks to the economy are the potential imposition of much tighter quarantine measures in Ukraine and globally, and a longer and stronger-than-expected surge in global inflation. Other proinflationary risks continue to loom large. Those include an escalation of Russian military aggression against Ukraine and a sharp worsening of external terms of trade.
Given the balance of risks, and considering how close the actual dynamics of macro indicators are to the current forecast, the NBU Board decided to raise its key policy rate to 8.5%. This decision corresponds to the projected trajectory of the key policy rate.
In addition, as previously reported, the NBU approved the rollback of its long-term refinancing tenders and interest rate swap auctions, starting in Q4 2021.
Apart from that, to improve monetary transmission performance, the NBU continued to normalize the design of its monetary policy. Specifically, from 1 October, the maturity of refinancing loans will be reduced to 30 days from 90 days.
What will the NBU’s monetary policy stance be, going forward?
If underlying inflationary pressures increase significantly and inflation expectations continue to worsen, the NBU will continue to use monetary instruments to return inflation to its 5% target.