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Ukraine Monetary Policy December 2018

Ukraine: Central Bank holds the key policy rate stable in December; announces changes to monetary policy design

At its 13 December meeting, the National Bank of Ukraine (NBU) kept the key policy rate fixed at 18.00%, marking the third consecutive meeting where the monetary policy stance was left unchanged. As a result, the key interest rate will close this year at the highest level since April 2016.

Sustained inflationary pressures supported the Bank’s decision to hold the rate stable. Headline inflation rose to a six-month high of 10.0% in November (October: 9.5%)—largely in line with the Bank’s projections, but still above its target range of 6.5% plus or minus 2.0 percentage points. Nevertheless, according to the NBU’s communiqué, inflationary risks retreated in recent months against the backdrop of lower global oil prices, the de-escalation of the U.S.–China trade conflict and more favorable conditions in the foreign exchange market. As a result, the Bank expects inflation to reach the 5.0% target by the end of 2020 amid tight monetary conditions which will keep household deposit rates elevated.

In the accompanying communiqué, the Central Bank of Ukraine also notified of changes to the operational design of its monetary policy effective from 11 January 2019. Going forward the Bank will use “tenders to both offer certificates of deposit with maturity of 14 days and provide refinancing for the same term” as its key monetary policy tool. Therefore, the new NBU key policy rate will reflect rates on two-week certificates of deposit and two-week refinancing loans. The decision to change the key monetary policy tool was driven by the risk posed by increasingly unstable liquidity in the banking system due to higher cash demand stemming from both private and public sector. The changes should enable greater flexibility in responding to changes in liquidity in the banking system. The key monetary policy objective of reducing inflation to the 5% target remains unchanged following the introduction of the new operational design.

The next monetary policy meeting is scheduled for 31 January 2019.

Ukraine Interest Rate Forecast

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