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Ukraine Monetary Policy March 2021

Ukraine: NBU unexpectedly tightens policy to rein in inflation

At its 4 March meeting, the National Bank of Ukraine (NBU) decided to lift the key policy rate from its all-time low of 6.00% to 6.50%, marking the first hike since 2018 and surprising market analysts, who had broadly expected the Bank to hold fire. The NBU’s decision was aimed at quelling rising inflationary pressures seen recently. Inflation rose for the fourth consecutive month in January, coming in at an over one-year high of 6.1% (December 2020: 5.0%). Preliminary data also showed that it continued to climb in February, with poor harvests and rising global commodity prices fueling food and fuel inflation. The Bank noted, however, that inflation will reach its peak mid-way through the year and ease thereafter, returning to its target band of 4.0%–6.0% by H1 2022. Meanwhile, the tightening of Covid-19 restrictions at home and abroad, coupled with slow progress in vaccination campaigns, clouds the outlook for the economy. Various factors, and the uncertainty surrounding them, could move inflation in either direction, but the recent buildup of pressures ultimately prompted the Bank to tighten its stance.

In terms of forward guidance, the NBU struck a hawkish tone, highlighting that it stands ready to increase its benchmark rate “more resolutely in order to curb fundamental inflationary pressures, stabilize expectations, and bring inflation back to its target”.

Commenting on potential factors influencing the Bank’s decision, Andrew Matheny and Tadas Gedminas, analysts at Goldman Sachs, noted:

“Today’s decision indicates that the NBU is willing to tighten in a front-loaded fashion amid rising inflation. This likely reflects its relatively short history of inflation targeting, which necessitates the need to maintain a tighter policy stance given that inflation expectations are not yet well anchored. We think that the decision may also reflect a view that FX plays a dominant role in shaping Ukrainian financial conditions, and that the Hryvnia has failed to strengthen meaningfully despite sizeable foreign inflows”.

The next monetary policy meeting is scheduled for 15 April.

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