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Ukraine Monetary Policy June 2019

Ukraine: Central Bank holds the key policy rate stable in June

At its 6 June meeting, the National Bank of Ukraine (NBU) kept the key policy rate unchanged at 17.50%, following a 50 basis points cut in the previous meeting. The decision was in line with the expectations of most market analysts and came against the backdrop of rising inflation as well as increased uncertainty surrounding further financial support from the IMF.

Inflation rose from 8.6% in March to 8.8% in April, chiefly on higher food and oil prices. As a result, it moved further above the Central Bank’s 6.5% plus or minus 2.0 percentage points target range, and continued to climb in May, according to the NBU’s estimates. Nevertheless, the Bank maintained its projection of inflation falling to 6.3% by the end of 2019, with prices for fuel and vegetables projected to ease in the second half of the year, and made no changes to its objective of reducing inflation to the 5.0% plus or minus 1.0 percentage point target range by the end of 2020.

In its communiqué, the Bank noted that despite an uptick in the headline reading, core inflation continued to moderate in recent months, while inflation expectations are gradually improving. However, inflation risks have increased since President Volodymyr Zelensky called snap parliamentary elections on 20 May. Of particular relevance, the IMF consequently halted negotiations over the next tranche of a USD 3.9 billion program until a government is in place, which could take months if no clear winner emerges from July’s snap parliamentary election. In addition, the Central Bank identified several other external and internal risks to the outlook, including slowing global growth amid ongoing trade wars, volatile commodity prices and ongoing military conflict with Russia.

Looking forward, further cuts remain likely, provided inflation expectations remain steady and inflationary risks begin to gradually retreat. Nevertheless, the Central Bank will likely have little space to maneuver before the political uncertainty stemming from snap elections is resolved.

The next monetary policy meeting is scheduled for 25 July.

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