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Ukraine Monetary Policy April 2021

Ukraine: Central Bank unexpectedly tightens policy for second consecutive time in April

At its 15 April meeting, the National Bank of Ukraine (NBU) decided to hike the key policy rate by 100 basis points to 7.50% from 6.50%. The move marked the second rise in consecutive meetings, and surprised market analysts who had broadly expected a smaller hike of 50 basis points.

The NBU’s decision was aimed at curbing inflationary pressures, which have mounted in recent months. Inflation rose for the seventh consecutive month in March, coming in at an almost two-year high of 8.5% (February: 7.5%) on the back of returning domestic demand and rising prices for food and energy worldwide. This led the NBU to raise its inflation forecast for 2021 to 8% from 7% previously. The Bank noted, however, that inflation will reach its peak in the third quarter of the year and ease thereafter, returning to its target band of 4.0%–6.0% by H1 2022. Meanwhile, the impact of newly implemented Covid-19 restrictions at home and abroad, coupled with a slow vaccine rollout, has significantly slowed the economic recovery, while uncertainty remains heightened amid other key risks such as new Covid-19 strains and further conflict at the eastern Ukrainian border. Against this backdrop, the Bank downgraded its projections for economic growth this year to 3.8% (previous estimate: +4.2%). It then expects growth to be close to 4.0% during 2022 and 2023. Despite the more downbeat outlook, however, elevated price pressures ultimately prompted the Bank to tighten its stance.

In terms of forward guidance, the NBU maintained a hawkish tone, highlighting that it stands ready to increase its benchmark rate again “if underlying inflationary pressures rise more noticeably than currently expected and if inflation expectations worsen”.

That said, Andrew Matheny and Tadas Gedminas, analysts at Goldman Sachs, do not see further tightening in 2021:

“After today’s decision we maintain our baseline expectation that the NBU will stay on hold through the rest of the year. Although inflation has scope to further surprise to the upside, the NBU appears to be setting a relatively high bar for the inflation overshoot to warrant additional policy rate increases. Considering that it revised its growth projections lower, it may also be concerned about tightening too much while downside risks to activity remain.”

The next monetary policy meeting is scheduled for 17 June.

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