Ukraine: Central Bank raises key rate as inflationary pressures persist
At its meeting on 25 January, the National Bank of Ukraine (NBU) in a surprise move announced its decision to hike the key policy rate from 14.50% to 16.00%, marking the third consecutive rate hike since October. The NBU’s easing cycle, which had seen the key rate drop from a multi-year high of 30.00% in July 2015 to 12.50% in May 2017, was reversed amid rising inflationary pressures. January’s hike represents further tightening of monetary policy by the Central Bank of Ukraine.
January’s hike was to a large extent due to the need to keep inflation under control and bring it to the target level in the medium term. Inflation hit 13.7% in December, with buoyant consumer demand for food products, coupled with a decrease in supply of certain food products, among the key drivers of high inflation rates. In addition, increasing production costs, particularly labor costs; a notable easing in fiscal policy; and exchange rate fluctuations increased underlying inflationary pressures further at the end of the year.
The NBU projects inflation will end 2018 at 8.9%, decelerating to 5.8% at the end of 2019 and 5.0% at the end of 2020. The Bank maintains that this forecast is subject to successful cooperation with the International Monetary Fund and the implementation of structural reforms essential to maintain macro-financial stability in the country.
Looking ahead, the Bank expects normalizing market conditions and tighter monetary policy to allow it to maintain inflation within the target range, thus leaving space for further rate hikes in the future. The next policy meeting is scheduled for 1 March.