Ukraine: Central Bank raises the key policy rate to 17.5%
July 12, 2018
At its 12 July meeting, the National Bank of Ukraine (NBU) decided to hike the key policy rate by 50 basis points to 17.50%, catching market analysts by surprise. It also resumed monetary tightening after leaving the policy rate unchanged in the two previous meetings, and the move brought the key interest rate to its highest level since May 2016.
Increased upside risks with regards to short- and medium-term inflation, as well as elevated inflation expectations, prompted the rate hike. Despite inflation moderating to 9.9% in June, which was below the NBU’s forecast, it remained notably above the Bank’s re-confirmed medium-term target of 5.0% plus or minus 1.0 percentage point. The Bank sees inflation at risk of deviating up from its projections in the coming quarters, fueled by higher-than-expected domestic demand on the back of higher wages and growing remittances from abroad.
In its communiqué, the Central Bank also noted that by increasing its key policy rate, it aimed to address the threat of postponed financing from the IMF that would likely translate into lower interest in Ukrainian sovereign debt on the part of investors. Ukraine has also felt the effects of capital outflows from emerging markets as investors turned their attention to the U.S. due to the stronger dollar, rising interest rates and faster growth. Lastly, the interest rate hike should support hryvnia exchange rates, which have already benefited from monetary policy tightening cycle in the face of an emerging markets currency selloff.
Looking ahead, the Bank signaled that its current monetary policy stance is based on the assumption that Ukraine continues implementing the structural reforms laid out by the IMF. The BNU left its inflation forecast for the end of 2018 unchanged at 8.9% and it expects inflation to return to its target range by mid-2019, ending the year at 5.8%. Nevertheless, further rate hikes this year cannot be completely dismissed. The NBU remains fully determined to tightening its monetary policy further in case of intensifying inflationary pressures or a deteriorating relationship with the IMF.
The next monetary policy meeting is scheduled for 6 September.
Author: Almanas Stanapedis, Research Team Manager