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Ukraine Monetary Policy July 2020

Ukraine: NBU keeps key policy rate unchanged at all-time low in July

At its 23 July monetary policy meeting, the National Bank of Ukraine (NBU) decided to hold the key policy rate at 6.00%, against market expectations of a 25-basis point cut. The key policy rate is at an all-time low following eight consecutive cuts that ended in June. Notably, July’s meeting marked the first by new governor Kyrylo Shevchenko after the unexpected departure of Yakiv Smolii at the start of the month, who resigned citing political pressure.

The NBU’s decision to pause its easing cycle was driven by slowly rising inflation and ample risks to its price forecast, as well as the fact that it views the recent cuts sufficient to stimulate the economy. Inflation rose modestly in June amid higher food prices and is seen continuing to increase by the end of the year due to fiscal and monetary stimulus, higher energy prices and a weak fruit harvest. Moreover, risks to Ukraine’s macroeconomic outlook are elevated. The reintroduction of strict containment measures for the pandemic, escalation of the military conflict, political turmoil and volatile food prices all plague the outlook. Accordingly, the NBU revised down its GDP forecast for Ukraine this year from a 5.0% contraction to a 6.0% drop and stated that it sees inflation ending the year around the 4—6% target range this year.

Looking ahead, the Bank gave strong forward guidance, with Governor Shevchenko stating that the key policy rate is expected to remain on hold for the rest of the year in the accompanying press conference.

The next monetary policy meeting is scheduled for 3 September.

Commenting on the decision and Shevchenko’s first meeting, analysts at Goldman Sachs added:

“Given the increased policy uncertainty after an unexpected change in the NBU’s leadership, there were questions as to whether this would lead to any change in monetary policy direction. Today’s decision reduces this uncertainty and is consistent with our interpretation of the “political pressure” cited by former Governor Smolii pertaining more to bank supervision matters than to the conduct of monetary policy. Taking into consideration the Board’s rate guidance and our projections that are broadly consistent with the revised NBU’s forecasts, we revise our policy rate forecast and now think that +6.0% will mark the trough in rates (versus +5.0% previously).”

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