Ukraine: Central Bank reverses course; hikes key policy rate amid rising inflation
October 26, 2017
The National Bank of Ukraine (NBU) decided to raise the key policy rate from 12.50% to 13.50% at its 27 October monetary policy meeting, a shift in direction after a long easing cycle to support battered economic activity. Starting in August 2015, the Bank had gradually lowered the key rate to 12.50% from 30.00%. However, rising inflation has eroded the Bank’s ability to support the economic recovery, and the Bank had paused its loosening cycle in July due to rising price pressures.
October’s hike was driven by a need to keep price pressures in check, after inflation hit 16.4% in September. Behind the rising price pressures are higher food prices due to poor weather, as well as higher services prices and demand pressures on the back of higher wages. In response, the NBU has updated its inflation forecast and now sees inflation ending 2017 at 12.2%, above its target range of around 8% plus or minus 2.0 percentage points. Next year, the Bank sees inflation ending the year at 7.3%. It sees inflation ending 2019 at 5.0%.
Looking forward, the Bank stressed that a return to its easing cycle would depend on the trajectory of inflation and on an improvement in inflation expectations. The NBU also emphasized that it may need to raise the key policy further to return inflation to its target path. The next policy meeting is scheduled for 14 December.