Ukraine’s central bank lowered its policy rate for the first time in 8 months as inflation has steadily declined but it remains careful about the next step in a new cycle of easing as there are risks that may hinder these plans and “further steps will depend on the realization of inflation risks and an improvement in inflation expectations.”
The National Bank of Ukraine (NBU) cut its key policy rate by 50 basis points to 17.50 percent, the first easing after a monetary tightening cycle from October 2017 to September 2018 that included 6 rate hikes and a total increase in the key rate of 550 points.
After the hike in September the NBU maintained its rate 18.0 percent, quickly boosting the exchange rate of the hryvnia and thus lowering import prices and inflation.
But inflation was slow to decline and remained above the bank’s target of 6.0 percent for the end of 2018 due higher administered prices, tariffs, oil, and strong consumer demand and wages. In 2018 inflation averaged 9.8 percent, down from 13.7 percent in 2017.
But since December inflation has fallen and last month NBU said it may switch to a monetary easing cycle if new forecasts in April show falling risks of inflation and improved expectations.
In line with its forecast from January, Ukraine’s inflation rate has continued to decelerate with headline inflation falling to 8.6 percent in March and core inflation falling to 7.6 percent, “evidence that underlying inflationary pressures continued to weaken in early 2019,” NBU said.
NBU said it still expects inflation to decline to 6.3 percent by the end of this year and then drop into its target range of 5.0 percent, plus/minus 1 percentage point, in early 2020 as wage growth slows, prices for natural gas decline, food product supply improves and the rise in the hryvnia helps limit the rise in the prices of non-foods.
This will also help core inflation slow to 5.0 percent this year and then 3.7 percent in 2020 while further rise in tariffs to market levels and higher taxes on alcohol and tobacco restrains price falls.
“Despite the electoral events, the situation on the Ukrainian financial market remains benign and inflation expectations continue to improve among households, businesses, banks, and financial analysts,” NBU said, referring to the election of comedian Volodymyr Zelenskiy as president.
As in January, the central bank expects Ukraine’s economy to slow this year to growth of 2.5 percent from an estimated 3.3 percent in 2018 due to slower global growth and trade, tight fiscal policy to repay debt, and continued tight monetary policy.
In 2020 the central bank expects growth to accelerate to 2.9 percent and then 3.7 percent in 2021, boosted by its gradual easing of monetary policy that will bolster domestic demand and spur investments once the parliamentary elections are over this year.
In addition to the uncertainty surrounding the presidential and parliamentary elections, NBU said a range of external risks were important, including the risk of global recession and lower commodity prices, stronger geopolitical tensions, uncertainty over gas transit in 2020 and pipelines being constructed, and any escalation of military conflict and trade restrictions by Russia.
The hryvnia was trading at 26.7 to the U.S. dollar today, up 3 percent this year.
The National Bank of Ukraine issued the following press release”
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