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Ukraine Monetary Policy September 2018

Ukraine: Central Bank hikes the key policy rate to 18.00%

At its 6 September meeting, the National Bank of Ukraine (NBU) decided to hike the key policy rate by 50 basis points to 18.00%. Notably, 2 of the 10-member committee favored increasing the key policy rate by 100 bp to 18.5% in the current session—a move anticipated by the majority of market analysts—with the other 8 voting for a more moderate 50 bp hike. The decision marked the second consecutive meeting where the Bank tightened its monetary policy stance and coincided with the arrival of the IMF mission to Ukraine amid Kiev’s hopes of securing another tranche of financing under the ongoing assistance program. As a result of the hike, the key interest rate now stands at the highest level since May 2016.

Despite sustained moderation in headline inflation in recent months (July: 8.9%; June: 9.9%), volatile external conditions have intensified upward risks to inflation, prompting the rate hike. The country’s foreign currency reserves fell to USD 17.2 billion in early September—just above the three-month import coverage level, which is considered a crucial buffer. On the domestic front, strong domestic demand in recent months continued to fan inflationary pressures, which remains a significant upside risk to the inflation outlook. In addition, increased volatility in global commodity markets, driven by an escalation of trade conflicts, could prevent inflation returning to the Bank’s target.

In its communiqué, the Bank noted that co-operation with the IMF remains critical to reducing inflation to its medium-term target of 5.0% plus or minus 1.0 percentage point. Increasing household natural gas tariffs closer to market levels is one of the Fund’s key requirements—something that the government has repeatedly been unwilling to commit to—before the next tranche of funds in the USD 17.5 billion lending program is released. The lack of progress in the IMF-Ukraine talks in recent months has been a major cause for concern for investors, adding further pressure amid the broader context of the recent emerging-markets selloff. The National Bank of Ukraine, which has been praised for its independence from the government and prudent policy-making, underscored that financial assistance from the IMF remains pivotal to the country’s macro-financial stability. The NBU remains fully determined to hike the rates by the end of the year if conditions require the Bank to minimize vulnerability of Ukraine’s economy to external shocks due to the deteriorating global market environment or a deviation from the inflation outlook.

The next monetary policy meeting is scheduled for 25 October.

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