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Ukraine Monetary Policy July 2021

Ukraine: NBU raises rates unexpectedly in July

At its 22 July meeting, the National Bank of Ukraine (NBU) raised its key policy rate by 50 basis points to 8.00%, surprising market analysts who had expected rates to be held. The move marked a continuation in the monetary policy tightening cycle following two consecutive hikes in March and April.

The NBU’s decision to increase its rate was prompted by elevated price pressures, as inflation remained at May’s two-year high of 9.5% in June, staying well above the NBU’s forecast and nearly twice as high as its 5.0% target. Price pressures will likely remain elevated in the short term on the back of a strong economic recovery and surging demand worldwide, thus leading the Bank to raise its inflation forecasts for 2021 to 9.6% from 8.0%. Meanwhile, despite some hints of robust growth in private spending and exports, the Bank left its GDP forecasts unchanged, as most gains will likely be offset by fresh lockdown measures imposed in previous months. Lastly, the Bank decided to continue phasing out the use of its additional monetary instruments, which should also help keep inflation relatively contained.

In its communiqué, the Bank struck a hawkish tone, stating that “if additional pro-inflationary risks materialize, the NBU stands ready to continue deploying monetary tools to return inflation to its 5% target”. Moreover, it hinted it will deliver another hike up to 8.50% and maintain the key rate at that level until the second quarter of 2022. The majority of our panel see rates staying on hold through to year-end, although a reasonable minority see them rising 50–100 basis points over the second half of the year.

Commenting on the outlook, Andrew Matheny and Tadas Gedminas, analysts at Goldman Sachs, remain slightly more dovish, saying:

“Although we think that there is a significant risk for a rate increase in the near term, if our more optimistic projections on the external side materialise, and if there are positive developments on the completion of the IMF review, that may offset the need for near-term tightening via a stronger exchange rate. However, if inflation surprises to the upside further, we think the NBU would likely raise rates again even if the external backdrop is supportive.”

The next monetary policy meeting is scheduled for 9 September.

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