Ukraine holds rate 2nd time, virus determines next move

      Ukraine's central bank left its key interest rate steady for the second consecutive time, saying future monetary policy decisions will depend on how the COVID-19 pandemic develops as the current policy stance is expansionary but still leaves room for further rate cuts if the economy needs stimulus.
      The National Bank of Ukraine (NBU) left its key policy rate at 6.0 percent, as in July when it paused after cutting it 9 times and by 12 percentage points since April 2019. 

     This year alone the rate was cut four times by a total of 7.50 percentage points.

     "Under current circumstances, the key policy rate of 6% is aimed at keeping the balance between maintaining moderate inflation and stimulating the economy," the NBU said, adding:

     "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 also deploy monetary tools to respond to the likely increase in inflation risks in 2021."

     The pause in monetary easing in July followed the bank's guidance in June the cycle of rapid monetary easing had come to an end and future policy decisions would depend on the prospects for inflation.

     Ukraine's inflation rate was steady at 2.4 percent in July and June - below the bank's target range of 5.0 percent, plus/minus 1 percentage points - and NBU said future changes will depend on fast the economy recovers from from the pandemic.

     But NBU also expects energy prices to continue to rise as the global economy recovers, boosting inflation in the final months of the year and paving the way for inflation to enter its target range.

     Ukraine's economy contracted 9.9 percent in the second quarter from the first quarter for an annual drop in gross domestic product of 11.4 percent after a fall of 1.3 percent in the first quarter.

     Although imports, retail, household spending on domestic tourism, real estate and cars indicate a further recovery in demand that is expected to continue in coming months, NBU said a new wave of COVID-19 could restrain slow the recovery, especially the services sector.

      "Maintaining a loose monetary policy will support economic recovery amid moderate inflation and elevated uncertainty over how the pandemic is going to spread in Ukraine and the world," NBU said.

      It was the second policy decision by the bank's board headed by Kyrylo Shevchenko who took over as governor in early July after Yakiv Smoliy resigned in protest over what he said was systematic political pressure.

     Ukraine's hryvnia took a hit after Smoliy's shock resignation on July 1 but since the previous board decision on July 23 the exchange rate has stabilized though it has dropped in the last two weeks.

    Today the hryvnia was trading at 27.7 to the U.S. dollar, still down 3.6 percent since Smoliy's resignation and down 14.8 percent this year.

      

     The National Bank of Ukraine issued the following press release:

"The NBU Board has decided to keep its key policy rate at 6% per annum. Maintaining a loose monetary policy will support economic recovery amid moderate inflation and elevated uncertainty over how the pandemic is going to spread in Ukraine and the world.

In July–August, inflation was below the target range of 5% ± 1 pp. The dynamics of core inflation were subdued. The revival in consumer demand and the rise in fuel and natural gas prices in line with global market trends were offset by seasonal adjustments in raw food prices.

Future movements in inflation will depend on how fast 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, which is likely to continue 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.

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, but also from the perspective of receiving support from other international partners and investors. Funds from these sources will go to finance anti-coronavirus measures and infrastructure projects, which will help jump-start the still weak investment activity.

As before, a longer-lasting coronavirus pandemic, the further spread of the disease and stricter quarantine measures remain the key risks to macrofinancial stability.

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%.

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 has also intensified its regulatory activities in order to promote lending, as well as activities aimed at reducing the share of nonperforming loans in the banking system. This will bolster the downward trend in interest rates on corporate and household loans.

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 also deploy monetary policy tools to respond to the likely increase in inflation risks in 2021.

The decision to keep the key policy rate at 6% was approved by NBU Board Decision No. 559-D on the key policy rate, dated 3 September 2020.

A summary of the discussion by Monetary Policy Committee members that preceded the approval of this decision will be published on 14 September 2020.

The next monetary policy meeting of the NBU Board will be held on 22 October 2020, according to the confirmed and published schedule."

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