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Ukraine Monetary Policy April 2019

Ukraine: Central Bank cuts the key policy rate for the first time in two years in April

At its 25 April meeting, the National Bank of Ukraine (NBU) cut the key policy rate by 50 basis points to 17.50%, marking the first rate cut in two years. The decision followed five consecutive meetings where the policy stance remained unchanged and was in line with the expectations of most market analysts.

The Bank’s decision was chiefly driven by moderating inflationary pressures. Inflation eased from 8.8% in February to 8.6% in March—in line with the Bank’s forecasts—largely on the back of moderating food prices amid lower global food prices and an increase in domestic food supply. This marked the lowest reading in two-and-a-half years, edging closer to the Central Bank’s 6.5% plus or minus 2.0 percentage points target range. In its communiqué, the NBU noted that core inflation declined faster than expected, suggesting that the fall in underlying inflationary pressures was even more profound.

In addition, the NBU highlighted prudent monetary policy was the key driver for moderating inflationary pressures and for gradually improving inflation expectations, which seemed to have largely escaped the effect of election-related uncertainties. The Bank continues to see inflation decelerating to 6.3% by the end of this year and maintained its objective of reducing inflation to the 5.0% plus or minus 1.0 percentage points target range by the end of 2020.

Looking forward, further monetary policy easing is likely, provided inflation expectations continue to improve and inflationary risks stemming from ongoing geopolitical tensions, global commodity prices and gas transit volumes remain at bay.

Andrew Matheny, an economist at Goldman Sachs, agrees and sees clear scope for further rate cuts:

“We continue to think that monetary conditions in Ukraine are sufficiently tight to weigh on inflation, with ex-post real rates higher than EM peer countries that have undergone recent episodes of disinflation. As a result, we expect further 350bp of cuts by end-year and, looking ahead, we see scope for up to 850bp of rate cuts to a terminal policy rate of +9.0%. Due to political uncertainties, however, our conviction in the magnitude of the rate cuts is higher than in the timing. While the presidential elections are now out of the way, the focus will now likely shift to the parliamentary elections scheduled for October.”

The next monetary policy meeting is scheduled for 6 June.

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