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Ukraine Monetary Policy April 2018

Ukraine: Central Bank leaves policy rate unchanged at 17.00% in May

At its meeting held on 24 May, the National Bank of Ukraine (NBU) decided to keep the key policy rate on hold at 17.00% for the second month, following four consecutive rate hikes up to March 2018.

The dynamics of the current inflationary environment drove the Bank’s policy rate decision. According to the NBU, its monetary policy stance is sufficiently tight to achieve the inflation goals set for the short-to-medium term. Despite deviating marginally from the Bank’s forecast, headline inflation continued trending downwards in the second quarter and overall remained on the projected trajectory. Nevertheless, the rate of inflation remained notably above the NBU’s mid-term target of 5.0% plus or minus 1.0% in April, coming in at 13.1% in the month. The rate was chiefly driven by inflationary pressures stemming from more volatile components, especially higher food prices, as core inflation was notably more moderate at 9.4% in the month, in line with the Bank’s projections.

In its communiqué, the Central Bank noted that its tight monetary policy stance has helped strengthen the local currency since the beginning of the year, with the hryvnia’s marked appreciation against the U.S. dollar and the euro in recent months signaling Ukraine’s improved debt repayment capabilities. The attractiveness of hryvnia-denominated financial instruments, which increased in line with policy rate hikes, was partly behind the appreciation. The bank also stated that inflation expectations have moved closer to the target range, and it expects the headline rate to moderate notably in May, reflecting both a statistical base effect from the previous year and a marked fall in food prices.

The Bank’s forward guidance suggests that several risks to the inflation outlook persist, including “a lack of progress in structural reforms and access to official financing”, and it signaled that “the NBU may hike the key policy rate to the level sufficient to drive inflation back to the established medium-term targets”. On 19 April the Bank left its inflation forecast for the end of 2018 unchanged at 8.9%. It expects inflation to return to its mid-range target by mid-2019 and end the year at 5.8%.

The next monetary policy meeting is scheduled for 12 July.

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