Ukraine: Central Bank holds interest rate at 15-year high
March 30, 2015
At its 25-26 March Monetary Policy meeting, the National Bank of Ukraine (NBU) decided to leave the discount rate unchanged at 30.0%. As a result, the discount rate remains at the highest level since 2000.
In its accompanying statement, the Central Bank stated that pressures in the foreign exchange market have showed signs of easing in recent weeks, although expectations for depreciation remains. The Bank added that high levels of inflation are expected and there is a risk of money market instability going forward. Against this backdrop, and with a goal of putting inflation on a downward path, the NBU decided to keep the discount rate at a historically high level. Going forward, the Central Bank expects slowly to lower interest rates as the hryvnia’s value stabilizes.
In addition to its monetary policy decision, the Central Bank also approved proposals for a new version of the Monetary Policy Fundamentals for 2015 and the Inflation Report. The Central Bank stated that the Monetary Policy Fundamentals for 2015 are based on three goals: (I) fulfilling the commitments outlined in the IMF’s Extended Fund Facility program; (II) adopt an inflation targeting regime once the necessary macroeconomic prerequisites are achieved; and (III) achieve an inflation rate of 5% a year in the medium term.
Looking forward, the NBU expects the Ukrainian economy to return to growth in Q2 2015, driven largely by the external sector and the utilization of spare capacity. For 2015, the Central Bank forecasts GDP to contract by 7.5% due to a base effect and rebound to 3% growth in 2016. Regarding price developments, the Bank stated that due to the drastic depreciation of the hryvnia, combined with increases in the prices of housing and utilities, it expects inflation to end-2015 at 30.0% before softening to 13.0% by the end of next year.