Ukraine: Central Bank holds the key policy rate stable in October
October 25, 2018
At its 25 October meeting, the National Bank of Ukraine (NBU) decided to leave the key policy rate fixed at 18.00%. The decision marked the second consecutive meeting where the Bank left its monetary policy stance unchanged and followed the previous week’s signing of a new USD 3.9 billion IMF agreement to help Ukraine maintain financial stability. As a result, the key interest rate remains at the highest level since May 2016.
Heightened inflationary pressures drove the Bank’s decision to hold the rate tight as headline inflation in September came in at 8.9%—exceeding both the Bank’s 6.5% plus or minus 2.0 percentage points target range and its July projection of 8.3%. Price pressures remain elevated thanks to buoyant domestic demand, higher relative prices of imported goods due to a weak hryvnia and firm global oil prices. Accordingly, the Bank revised up its inflation forecasts and now expects the headline rate to end 2018 at 10.1% (previously forecasted: 8.9%) and 2019 at 6.3% (previously forecasted: 5.8%).
Looking ahead, the Bank signaled that it expects inflation will take longer than previously expected to return to the target range, largely due to fast-rising wages, strong consumer demand and surging global oil prices. Nevertheless, the Bank sees tight monetary policy conditions driving inflation down to its medium-term target of 5.0% by the end of 2020, notwithstanding significant risks due to uncertainty surrounding external conditions. In addition, reasonably low exchange rate volatility and the new financial arrangement with the IMF are expected to lend support in anchoring inflation expectations.
The NBU has not ruled out another rate hike in the coming months. Its current stance is contingent on the successful implementation of the signed IMF deal, as well as on the normalization of inflation expectations and a relatively uneventful election cycle. While most of our analysts see the rate ending this year at the current level, two panelists expect a rate hike in the last quarter of the year. All panelists unanimously see, however, the Bank entering a gradual easing cycle next year.
The next monetary policy meeting is scheduled for 13 December 2018.
Ukraine Interest Rate Forecast
FocusEconomics Consensus Forecast panelists see the key policy rate ending 2018 at 18.10%. For 2019, the panel expects the key policy rate to fall to 15.89% by year-end.
Author: Almanas Stanapedis, Economist