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Ukraine Monetary Policy January 2022

Ukraine: NBU hikes rates in January amid tensions with Russia

At its first meeting of 2022 on 18–19 January, the National Bank of Ukraine (NBU) raised its key policy rate by 100 basis points to 10.00%. The move marked a continuation in the monetary policy tightening cycle, which totaled five hikes in the whole of 2021.

The NBU’s decision to raise rates came amid elevated tensions at the border with Russia and worries that upward price pressures could pose a risk to the inflation outlook. Inflation continued its downward trend in December last year after peaking in September, coming in at 10.0% (November: 10.3%). Although the Bank expects inflation to steadily reach its 5.0% target, it specifically mentioned that “the decline has been slower than expected, and the underlying inflationary pressure has even increased”. Global energy prices, strong consumer demand and increases in production costs were all identified as the main contributors to these pressures, and prompted the Bank to raise its 2022 inflation forecast to 7.7% from 5.0%.

Meanwhile, slower-than-expected GDP growth in 2021 led the Bank to lower its GDP projections for 2022, to 3.4% from 3.8%. Lastly, speculation over the possible military conflict has continued to take a noticeable toll on FX rates, threatening to severely affect investment activity and giving the NBU further grounds to raise its key policy rate.

In its communiqué, the NBU maintained its hawkish tone, stating that “if geopolitical risks increase, the NBU will stand ready to tighten its monetary policy”. Moreover, a larger hike was discussed at January’s meeting, with seven members of the board initially calling for the key policy rate to be raised to 11.00%, before ultimately settling on 10.00%. Although some of our panelists see rates rising further in Q1 2022, a solid majority expect the NBU to lower them by the end of the year as inflation moderates.

Regarding the outlook, Andrew Matheny and Tadas Gedminas, analysts at Goldman Sachs, noted:

“While there are risks that the current geopolitical tensions could escalate further and the uncertainty that this has generated may also extend for some time […] we have recently argued that that under most moderate geopolitical scenarios we see external and fiscal risks as manageable. In our view, the main vulnerability stems from domestic confidence risks that could trigger capital flight, but we think that, consistent with today’s decision, the NBU is ready to tighten policy pro-actively to limit these risks, and in today’s guidance the NBU signaled intentions for further rate increases as well.”

The next monetary policy meeting is scheduled for 3 March.

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