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Ukraine Monetary Policy October 2019

Ukraine: NBU cuts the key policy rate again in October

At its 24 October meeting, the National Bank of Ukraine (NBU) decided to cut the key policy rate to 15.50%, from 16.50%. The decision marked the fourth cut so far this year as the Bank unwinds its tight stance. Market analysts, however, had predicted a smaller 50 basis points chop. Overall, monetary policy still remains contractionary after the NBU ratcheted up the policy rate in 2015 after the political crisis caused the hryvnia to depreciate sharply.

Falling inflation has allowed the Bank to stick with its easing cycle. In its accompanying statement, the Bank commented that inflation fell more than expected in September and is expected to continue to drop thanks to the strong hryvnia, low global energy prices and still tight monetary policy. The NBU kept its inflation forecast unchanged and reiterated that it sees inflation falling to 6.3% by the end of the year, and returning to its medium-term target of 5.0% by the end of 2020. However, the NBU revised its growth forecast upwards, citing sustained healthy domestic demand and higher productivity in the agricultural sector. The Bank now sees GDP growing 3.5% in 2019 (previously: +3.0%) and 4.0% in 2020 (previously: +3.2%).

Looking ahead, the NBU signaled that it will continue with its easing cycle and projects that the key policy rate will fall to 8.0% 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 structural reforms are implemented quickly. Notably, the Bank highlighted that it assumes a new IMF deal will be approved by the end of the year, and that a delay in cooperation between the government and the IMF poses the chief risk to the forecast.

The next monetary policy meeting is scheduled for 12 December.

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