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Ukraine Monetary Policy December 2020

Ukraine: NBU stands pat in December

At its 10 December meeting, the National Bank of Ukraine (NBU) kept the key policy rate unchanged at its all-time low of 6.00%, marking the fourth consecutive hold and coming in line with market expectations.

The NBU’s decision to maintain its loose policy stance was chiefly driven by precarious economic conditions due to lingering pandemic-related restrictions. Notably, although the second wave of Covid-19 cases and a subsequent new lockdown scheduled for mid-January signaled that further easing may be warranted, stronger-than-expected inflationary pressures left little room for maneuver. Inflation jumped to 3.8% in November from 2.4% in October, moving closer to the lower bound of the Bank’s target band of 5.0% plus or minus 1.0 percentage point. Meanwhile, financial stability risks eased at the end of the year following positive developments with the IMF and an improvement in financial market sentiment, further supporting the Bank’s decision to stand pat.

In terms of forward guidance, the NBU mostly maintained its neutral tone, saying that its policy “will mainly depend on how the pandemic develops and how high inflation risks are”. On the one hand, the Bank noted that it “stands ready to raise its key policy rate in response to accelerating inflation on the back of a revival of the global and Ukrainian economies”. On the other hand, the NBU acknowledged that restrained consumer demand and slowing overall economic growth would enable it “to give the economy additional monetary impetus for growth”.

Commenting on the NBU’s policy outlook, economists at Goldman Sachs said:

“Although there have been a number of recent dovish developments, we think that such inflation backdrop is likely to lead the NBU to hold off from rate cuts. As we continue to expect inflation to overshoot the NBU’s target from Q1 onwards, driven by weaker exchange rate and the 30% minimum wage hike, an inflation path that is consistent with the latest NBU’s projections, we continue to think that the NBU will begin raising rates from late 2021H1.”

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