Ukraine: NBU stands pat in October
October 22, 2020
At its 22 October meeting, the National Bank of Ukraine (NBU) decided to keep the key policy rate unchanged at its all-time low of 6.00%, marking the third consecutive hold and coming in line with market expectations. As in the previous September meeting, the NBU’s decision to maintain its loose stance reflected its aim to help the economy recover from the Covid-19 blow and bring inflation back to target. Price pressures have remained weak in recent months, with inflation easing to 2.3% in September (August: 2.5%)—remaining markedly below the Bank’s target band of 5.0% plus or minus 1.0 percentage point—as increased food supply outweighed the effects of a depreciating hryvnia and higher energy prices. As a result, the Bank revised down its year-end inflation forecast to 4.1% (from 4.7% previously). Nevertheless, it expects price pressures to build next year in line with recovering activity and as the minimum wage hike boosts demand, causing inflation to overshoot its target band for most of 2021 before moderating back to target by mid-2022. On the economy, the monetary authority sees a 6.0% GDP contraction this year but a strong rebound in 2021 on the back of sturdy household consumption. Risks to the outlook persist, however, most notably related to the course of the pandemic, military conflict and global food price volatility.
In terms of forward guidance, the NBU struck a relatively neutral tone, emphasizing that it stands ready to further cut the rate if the economic and health situations deteriorate, or conversely, tighten policy if inflationary pressures intensify. Notably, it stressed that its conduct of policy will also be guided by the “budgetary parameters” that are adopted, likely referring to the hefty 30% minimum wage hike and continued fiscal support slated for next year.
Commenting on the NBU’s near-term policy outlook, Andrew Matheny and Tadas Gedminas, analysts at Goldman Sachs, noted:
“Communication and the NBU's forecast changes are consistent with our expectations that the NBU will keep rates on hold through 2021Q1, before beginning to tighten policy in 2021Q2. That said, with one remaining MPC meeting scheduled for December 9, we still see a small risk of a rate cut in the event that inflation surprises to the downside again, that revisions to the budget law imply a tighter fiscal policy stance next year, and/or if the pandemic situation deteriorates further.”
The next monetary policy meeting is scheduled for 10 December.
Author: Javier Colato, Economist