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Ukraine Monetary Policy March 2020

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

At its 10 March, the National Bank of Ukraine (NBU) decided to cut the key policy rate to 10.00% from 11.00%, marking the sixth consecutive cut. The decision was in line with analysts’ expectations and followed a 250-basis-points chop in the previous meeting in January. 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.

A quicker-than-expected disinflationary trend over the past months, slowing economic activity in the last stretch of 2019 and increasing downside risks to growth due to the coronavirus pandemic were largely behind the Bank’s decision. Inflation fell to 2.4% in February (January: 3.2%), its lowest result in six years and markedly below the target of 5.0% plus or minus one percentage point. A strong hryvnia, growing supply of food and lower oil prices were largely behind the decline in inflation. Meanwhile, although the spread of coronavirus has not yet hit economic activity, its effect on global financial markets has weighed on the hryvnia and heightened unease among investors at a time of political uncertainty stemming from the recent government reshuffle.

Going forward, the Bank intends to continue unwinding its tight stance, although the pace of easing may slow if downside risks materialize. On the one hand, the Bank’s base case scenario relies on a new deal with the IMF, which remains crucial to protect the economy from turbulence in global financial markets. On the other hand, the evolution of the coronavirus pandemic and its effects on inflation and economic activity will also determine the future path of monetary policy.

The next monetary policy meeting is scheduled for 23 April.

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