Ukraine: Central Bank leaves policy rate unchanged at 17.00%
April 12, 2018
At its meeting held on 12 April, the National Bank of Ukraine (NBU) decided to keep the key policy rate on hold at 17.00% following last month’s rate hike, which had marked the fourth consecutive rate hike since October 2017. The decision was in line with market expectations.
Inflation dynamics were central to the NBU’s decision to stand pat, as headline inflation edged down in March. The Central Bank stated that current monetary conditions would support a further decline in inflation to its mid-term target. Headline inflation remains above the NBU’s target, chiefly driven by inflationary pressures stemming from higher food prices amid increased exports and a decrease in agricultural output, as well as higher labor costs. In addition, healthy consumer demand on the back of rising household incomes is putting added stress on price pressures. On the other hand, the higher key policy rate has increased the attractiveness of hryvnia-denominated financial instruments, helping the recent appreciation of the hryvnia in Q1 2018.
In its accompanying statement, the Central Bank stated that several risks to the inflation outlook persist, including high inflation expectations, continued rapid growth in consumer demand, and the potential for loose fiscal policies, which would exacerbate demand pressures. Furthermore, the NBU emphasized the main risk to the outlook was a lack of structural reforms, which are essential to receiving pertinent IMF loans that are needed for Ukraine to finance its public debt repayments.
The Bank’s forward guidance suggested that the tightening cycle will be on pause for the medium term. The NBU noted that it “believes that current monetary conditions are tight enough to reduce inflation in the mid-term”. The Bank left its inflation forecast unchanged at 8.9% for the end of 2018. A new forecast will be released by the Central Bank in its Inflation Report on 19 April. The next policy meeting is scheduled for 24 May.
Ukraine Interest Rate Forecast
FocusEconomics Consensus Forecast panelists see the key policy rate ending 2018 at 15.03%. For 2019, panelists expect the key policy rate to fall to 11.94% by year-end.