Ukraine: Central Bank hikes key policy rate to 17.00%
At its meeting on 1 March, the National Bank of Ukraine (NBU) decided to raise the key policy rate from 16.00% to 17.00%, marking the fourth consecutive rate hike since October. The NBU’s easing cycle, which had seen the key rate drop from a multi-year high of 30.00% in July 2015 to 12.50% in May 2017, was reversed last year amid rising inflationary pressures. While market analysts had projected a hike in the key rate, the size of the increase was larger than expected, and the key rate is now at the highest level since May 2016.
Higher inflation drove the Central Bank’s decision, as it tries to bring price pressures back to its target level in the medium term. Price pressures have risen sharply in recent months, chiefly due to strong growth in prices for food and services, as well as a weak hryvnia and higher global commodity prices. Moreover, buoyant consumer demand due to rapid wage growth, because of an increase in the minimum wage at the start of 2018, has elevated price pressures. The NBU commented in its accompanying statement that several risks to the inflation outlook persist, including uncertainty over the country’s IMF program, high inflation expectations and continued rapid growth in consumer demand.
The Bank’s forward guidance suggested that this could be the final hike in the tightening cycle, with the NBU stating that “[it] believes that after several policy rate increases, which began in October 2017, the current monetary conditions are sufficiently tight to bring inflation back to its mid-term target”. The Bank sees inflation falling to 8.9% by the end of 2018. However, it still acknowledged that it could need to hike the policy rate further if inflation risks rise in the coming months. The next policy meeting is scheduled for 12 April.