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Ukraine Monetary Policy January 2021

Ukraine: NBU stays put in January

At its first meeting of the year on 21 January, the National Bank of Ukraine (NBU) decided to keep 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 reflected the need to continue supporting the economic recovery, despite rising inflation. Price pressures gained pace at the end of 2020, as expected, due to recovering activity globally and strengthening consumer demand domestically. The Bank assessed that although inflation will pick up in the first half of this year amid higher energy prices and continued gains in household spending, it will return to its target band of 4.0%–6.0% by H1 2022. Consequently, the NBU revised its inflation forecast for end-2021 upwards from 6.5% to 7.0%. On the economic front, the pandemic’s hit has been weaker than expected thanks to strong public and private consumption underpinning a rapid recovery in the second half of 2020. This year, the economy is expected to recover most of its pandemic-induced losses, with sturdy growth projected thereafter. The primary assumption underpinning the NBU’s forecasts remains cooperation with the IMF, with further financing from multilateral lenders expected for budget support.

In terms of forward guidance, the NBU struck a cautious but relatively hawkish tone, highlighting that it stands ready to hike rates if the inflationary trend persists. In particular, if price pressures stoked by higher inflation expectations and stronger consumer demand are not offset by other factors such as large capital inflows, the Bank will tighten in order to bring inflation back to its target.

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

“Notwithstanding higher inflation in the near term, we think that a constructive external backdrop should remain in the near term for Ukraine, as suggested by the return of capital inflows into Ukraine’s local government debt market, as well as more positive current account developments in the second half of last year. Set against this, we maintain our baseline expectation for tightening to begin in Q2 this year, with a total of 50bp of rates hikes to 6.5% delivered over the course of 2021”.

The next monetary policy meeting is scheduled for 4 March.

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