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Ukraine Monetary Policy December 2019

Ukraine: NBU cuts the key policy rate again in December

At its 12 December meeting, the National Bank of Ukraine (NBU) decided to cut the key policy rate to 13.50%, from 15.50%. The decision marked the fifth cut so far this year as the Bank unwinds its tight stance. Market analysts, however, had predicted a smaller 100 basis points chop. 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.

Emboldened by slower-than-expected inflation and a staff-level cooperation agreement with the IMF, the NBU lowered the rate by twice as much as most analysts predicted. A pronounced appreciation of the hryvnia caused inflation to decelerate to 5.1% in November, its lowest point since March 2014, surprising policymakers who had previously expected it to reach the medium-term 5.0% target by the end of 2020. Moreover, the approval of a USD 5.5 billion loan by the IMF on 7 December reassured the Bank of the country’s macrofinancial stability.

Looking ahead, the NBU signaled that it will continue with its easing cycle and confirmed its earlier projection that the key policy rate will fall to 8.00% by the end of 2021. However, the Bank noted that the pace of easing could be quicker than expected if inflation falls more than anticipated and if the IMF-backed structural reforms are implemented swiftly. On the other hand, external risks stemming from new trade restrictions by Russia and turbulence in global financial markets continue to pose risks to the outlook for inflation.

The next monetary policy meeting is scheduled for 30 January 2020.

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