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Ukraine Monetary Policy December 2021

Ukraine: NBU raises rates in December

At its last meeting of 2021 on 8 December, the National Bank of Ukraine (NBU) raised its key policy rate by 50 basis points to 9.00%, despite hinting that it would hold rates until at least Q3 2022 at its previous meeting. The decision came on the back of a 7-3 majority vote, with the three dissenting members voting for a sharper 100 basis-point hike. 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 was largely focused on guaranteeing that inflation reaches its 5.0% target and keeping upward price pressures contained. Inflation came in at 10.9% in October, ticking down from September’s 11.0% result, which had marked an over three-year high. After expecting inflation to reach single-digit figures by end-2021, the Bank remarked that “the inflation surge has passed its peak, but inflation is declining slower than expected” amid elevated food and energy prices, coupled with robust consumer demand.

Meanwhile, ongoing tensions at the Russian border are taking a noticeable toll on FX rates, posing further risks to the outlook and threatening to dampen the already fragile economic recovery. In addition, the NBU noted that the logistical fallout from the spread of the Omicron variant could prompt stagflation, further incentivizing it to raise rates.

In its communiqué, the NBU maintained its hawkish tone, stating that “if pro-inflationary factors continue to materialize, the NBU stands ready to raise its key policy rate at the next Board meetings on monetary policy issues”. Moreover, the majority of the Bank’s members called for further rate hikes in the upcoming meetings. Although some of our panelists see rates rising in Q1 2022, a solid majority expect the NBU to lower them by the end of the year as inflation moderates.

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

“Looking ahead, if inflation develops broadly in line with our expectations, and the pressures on the exchange rate stabilise, we think the NBU will refrain from further tightening. However, upside surprises to inflation or more negative exchange rate developments (either from global risk sentiment or rising geopolitical risks) skews the risks in the near term towards further monetary tightening. Beyond the near term, we think the NBU could begin to reverse rate hikes from Q4 2022 under our baseline scenario.”

Meanwhile, analysts at the EIU see rate cuts somewhat earlier in the year:

“Although the NBU would prefer a cautious approach to rate rises—especially as the economy remains under strain from the pandemic—several factors have driven the recent rate hike and will continue to exert inflationary pressures. Rising natural-gas and food prices will likely exceed expectations as winter approaches. In addition, geopolitical risks around the prospects of renewed military conflict can worsen inflation expectations. We expect the Central Bank to begin slowly to ease rates from the third quarter of 2022 as energy demands subside and inflation decelerates.”

The next monetary policy meeting is scheduled for 18–19 January.

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