Dear colleagues,
Please be informed that the Board of the National Bank of Ukraine has decided to keep its key policy rate unchanged, at 6% per annum. Maintaining a loose monetary policy will support economic recovery amid moderate inflation and elevated uncertainty over further spread of the pandemic in Ukraine and the world.
How have prices moved in recent months?
In July through August, inflation was below the target range of 5% ± 1 percentage point.
The dynamics of core inflation were subdued. We saw a revival in consumer demand and a rise in fuel and natural gas prices in line with global market trends. However, the impact of these factors was offset by seasonal adjustments in raw food prices.
How will prices grow going forward?
Future movements in inflation will depend on how quickly the economy recovers.
Data on imports, the retail trade, and household expenditures on domestic tourism, real estate, and cars indicate a further recovery in consumer demand. Consumer demand is likely to continue to recover in the coming months.
The NBU’s monetary policy easing cycle and the government’s fiscal stimulus, including changes in social standards, will support this trend.
At the same time, energy prices will continue to increase as the global economy gradually recovers from the coronavirus crisis.
The statistical effect of the low comparison base formed in the final months of last year will make a significant contribution to the overall rate of inflation.
All of this paves the way for inflation to enter the target range by the end of the year.
What else was factored into the key policy rate decision?
The primary assumption behind the NBU Board’s decisions remains that Ukraine will continue to cooperate with the IMF.
This cooperation is important not only in terms of financing the state budget deficit. It also ensures that other international partners and investors will support Ukraine. Funds from these sources will go to finance anti-coronavirus measures. In addition, these funds will go towards infrastructure projects, which will help jump-start the still weak investment activity.
As before, a longer-lasting coronavirus pandemic and the further spread of the disease remain the key risks to macrofinancial stability. And as a consequence, there is a risk of stricter quarantine measures.
The increase in the number of coronavirus cases in Ukraine seen in recent months has not affected the pace of economic recovery. Nevertheless, a new wave of COVID-19 could restrain consumer demand and slow the recovery in domestic-market-oriented sectors, especially the services sector.
Other risks also remain significant. They include:
- the negative impact of certain court rulings on macrofinancial stability
- an escalation of the military conflict in eastern Ukraine or on the country’s borders
- the higher volatility of global food prices, driven by global climate change and the risk of stronger protectionist measures.
Given the above balance of risks and the steady trend towards a recovery in consumer demand, the NBU Board kept the key policy rate unchanged, at 6%.
Will this decision support the economy amid the global crisis?
The NBU’s answer is yes. The fact that the key policy rate is being kept below its neutral level shows that monetary policy is expansionary. The policy also leaves enough room for further interest rate cuts in the economy. Previous key policy rate cuts are continuing to be transmitted to market rates. More specifically, interest rates on hryvnia domestic government debt securities and hryvnia deposits are at record lows. Loan rates are also continuing to fall.
The NBU is also taking other measures to support the economy. More specifically, the NBU has intensified its regulatory activities in order to promote lending. The central bank is also involved in active efforts to reduce the share of nonperforming loans in the banking system. There’s demand among the banks for the NBU’s new instruments - long-term refinancing and interest rate swaps. These instruments increase the banks’ long-term funding and decrease their risks. All of these measures will bolster the downward trend in interest rates on corporate and household loans.
What will the NBU’s monetary policy stance be in future?
The NBU’s future monetary policy will mainly depend on how the COVID-19 pandemic develops.
Under current circumstances, the key policy rate of 6% is aimed at keeping the balance between maintaining moderate inflation and stimulating the economy.
However, if the adverse impact of the coronavirus pandemic on domestic demand and business activity increases, the NBU will be ready to give the economy additional impetus for growth.
Conversely, the NBU could raise its key policy rate to respond to the likely increase in inflation risks in 2021.
Thank you for your attention!