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Ukraine Monetary Policy January 2020

Ukraine: NBU axes key policy rate to near-six-year low in January

At its 30 January meeting, the National Bank of Ukraine (NBU) decided to cut the key policy rate to 11.00% from 13.50%. The decision, which exceeded analysts’ expectations of a 200-basis-points chop, followed five cuts in 2019 as the Bank unwinds its tight monetary policy stance. Overall, monetary policy still remains contractionary; the NBU ratcheted up the policy rate in 2015 after the political crisis caused the hryvnia to depreciate sharply.

The Bank’s decision to lower rates reflected a quicker-than-expected fall in inflation at the end of 2019. Inflation declined to 4.1% in December, a six-year low, thus landing below the midpoint of the Bank’s medium-term inflation target of 5.0% plus or minus one percentage point. A strong hryvnia was largely behind the moderation of price pressures in the second half of last year, which more than offset robust consumer demand.

Going forward, the NBU plans to further cut rates, mainly in H1 of this year, down to 7.00% by the end of this year. That said, the pace of monetary policy easing will depend on the trajectory of inflation. As it stands, the Bank projects inflation to remain below its target band for most of the year, restrained by a supportive currency, relatively low global energy prices and contained food inflation. On the economic front, risks stem from any delays in entering into a new cooperation agreement with the IMF, an escalation of the military conflict in eastern Ukraine and a decrease in foreign capital inflows.

The next monetary policy meeting is scheduled for 12 March 2020.

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