Ukraine raises rate as signaled, ready for further hikes

     Ukraine became the 7th central bank to raise its key interest rate this year in response to growing inflationary pressures and said it was "ready to raise its key policy rate more resolutely in order to curb fundamental inflationary pressures, stabilize expectations, and bring inflation back to its target."
     The National Bank of Ukraine (NBU) raised its key policy rate by 50 basis points to 6.50 percent, its first rate hike since September 2018 and a reversal of two-year easing cycle.
     Beginning in April 2019 NBU cut its key rate 9 times and by a total of 12 percentage points until June last year when it lowered the rate to 6.0 percent as part of four rate cuts in 2020.

     But by the end of last year, inflation and inflation expectations in Ukraine began to accelerate and it became clear that economic activity had not plunged as much as initially feared from measures to contain the COVID-19 pandemic.

     At its previous policy meeting in January, the bank's monetary policy committee left little doubt that it was starting to shift toward tightening its policy as it was clearly concerned over what it said was "much stronger inflationary pressures" than expected.

     Two of its 10 members voted to raise the rate in January and it told financial markets and investors that it "stands ready to raise its key policy rate."

     Citing what it said were a "significant rise in fundamental inflationary pressures," the central bank raised its rate to gradually lower inflation towards its target against a backdrop of a recovery of the Ukrainian and global economy.

     Inflation in Ukraine rose to 6.1 percent in January from 5.0 percent in December and has continued to accelerate in February, according to the bank's estimates, as food and fuel prices push up prices.

     On top of rising commodity prices, food prices in Ukraine have risen in response to a poor harvest, inflationary pressures from trading partners is rising, domestic demand remains robust and there are still lagged effects from last year's depreciation of the hryvnia.

     "The global and Ukrainian economies, which are recovering rather quickly, will produce signifiant inflationary pressures throughout the whole of 2021," the bank said, adding it expects inflation to peak by mid-2021 but then slowly decelerate and return to its target range of 5.0 percent, plus/minus 1 percentage points in the first half of 2022.

     The National Bank of Ukraine issued the following statement:

     

     

"The Board of the National Bank of Ukraine has decided to raise the key policy rate to 6,5% per annum. The decision is aimed at gradually reducing inflation to its target, as the Ukrainian and global economies are recovering. 

Inflation accelerated in early 2021 and, as expected, deviated from the 5% ± 1 pp target range. 

Consumer inflation increased to 6.1% yoy in January. Inflation continued to accelerate in February according to the NBU’s preliminary estimates. Consumer inflation reading, which was calculated using online monitoring data, exceeded the NBU’s forecast, while inflation expectations remained elevated. At the same time, the underlying inflationary pressure, as seen in core inflation, was generally in line with the regulator’s forecast trajectory in January–February. 

Food and fuel prices contributed most to the rise in inflation in the first months of 2021. This is explained by poorer harvests and a rapid growth in global commodity prices, fueled by the fast pace of the revival in the global economy. Inflationary pressures from trading partner countries continued to increase. Domestic consumer demand remains robust. Moreover, the price trend continues to be influenced by the effects of last year’s hryvnia depreciation. 

Inflation will reach its peak in mid-2021, but will decelerate afterwards, returning to its target range in H1 2022. 

The global and Ukrainian economies, which are recovering rather quickly, will produce significant inflationary pressures throughout the whole of 2021. However, the inflation trend will be reversed gradually as new harvest supplies come to the market, the effect of a low comparison base wanes for some products, and the NBU raises its key policy rate. Inflation will thus decelerate at the end of the year and will settle within the 5% ± 1 pp target range in H1 2022. 

The primary assumption of the NBU Board is that Ukraine will continue to cooperate with the IMF. 

The NBU expects further progress to be made in negotiations between Ukraine and the IMF. Cooperation with the IMF and other international partners is essential for financing budget requirements and providing the economy with an additional impetus for growth. This will also enable Ukraine to maintain its international reserves at about USD 30 billion. 

As before, the imposition of stricter quarantine restrictions in Ukraine and globally to fight the COVID-19 pandemic remains the key risk to macrofinancial stability. 

Vaccination campaigns are already proving to be effective in some countries. However, they are being rolled out rather slowly, as a result of which the risk of tighter quarantine measures this year remains significant. In particular, some regions of Ukraine have seen a significant rise in morbidity in recent months. The pandemic still poses the threat of a decline in business activity and a cooling of consumer and investment demand. This, in turn, could rein in inflation.

Conversely, the rapid recovery of business activity, rebounding commodity markets, the lagged effect of large-scale expansionary measures, and potential pent-up demand are generating risks of higher inflation globally. Under such conditions, among other things, inflationary pressures from Ukraine’s main trading partners could increase further.

There are other significant risks. They include:

• volatile global capital markets
• a more dramatic deterioration in the terms of trade 
• an escalation of the military conflict in eastern Ukraine or on the country’s borders.

Given the above balance of risks and the significant rise in fundamental inflationary pressures seen in recent months, the NBU Board decided to raise the key policy rate, to 6,5%.

The NBU stands ready to raise its key policy rate more resolutely in order to curb fundamental inflationary pressures, stabilize expectations, and bring inflation back to its target.

A summary of the discussion by Monetary Policy Committee members that preceded the approval of this decision will be published on 15 March 2021. 

 

The next meeting of the NBU Board on monetary policy issues will be held on 22 April 2021, according to the confirmed and published schedule."

    www.CentralBankNews.info