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Ukraine Monetary Policy September 2019

Ukraine: NBU chops the key policy rate again in September

At its 5 September meeting, the National Bank of Ukraine (NBU) decided to cut the key policy rate to 16.50%, from 17.00%. Market analysts’ expectations were divided; however, the bulk had expected a cut. The decision marked the third cut so far this year as the Bank unwinds its tight stance. Overall, monetary policy still remains contractionary after the NBU had to ratchet up the policy rate in 2015 after the political crisis caused the hryvnia to depreciate sharply .

Despite higher inflation in July, the Bank kept on its easing course, citing temporary price pressures as behind the spike in its accompanying statement. A stronger hryvnia and lower inflation expectations have helped bring down core inflation, and inflation is seen easing ahead. The NBU kept its inflation forecast unchanged and reiterated that it sees inflation returning to its medium-term target of 5.0% by the end of 2020, and stated that the balance of risks to its price projections has not changed since its last monetary policy meeting.

The NBU signaled that it will continue with its easing cycle and that the pace of easing could pick up if structural reforms are implemented quickly. Notably, the Bank stated that internal political risks to inflation have decreased with the end of the country’s election cycle and the strong mandate won by President Volodymyr Zelensky. If Zelensky’s administration can move quickly with reforms, this should open up space for stronger easing. However, the NBU did caution that risks to the trajectory persist, chiefly stemming from the conflict with Russia, turbulent global financial markets and upside pressure from domestic demand.

Looking ahead, almost all of our panelists see the NBU continuing to cut rates in the coming quarters. Commenting on their projections, the research team at Goldman Sachs elaborates:

“We maintain our forecast for a linear pace of rate cuts at 50bp per meeting (400bp/year), which implies a decline in the policy rate to 15.5% at end-2019, 11.5% at end-2020 and a terminal rate of 9% in 2021. If our inflation forecast plays out, however, we see risks becoming increasingly tilted towards a more front-loaded pace of easing once inflation reaches the target range (around the turn of the year, on our baseline projections).”

The next monetary policy meeting is scheduled for 24 October.

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