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Ukraine Monetary Policy June 2021

Ukraine: Central Bank stands pat in June

At its 17 June meeting, the National Bank of Ukraine (NBU) held its key policy rate stable at 7.50%. The move marked a pause in the monetary policy tightening cycle, following two consecutive hikes in March and April.

The NBU’s decision to stay put came despite rising price pressures, as the Bank aimed to balance the need to restrain inflation with propping up the ailing economy. Inflation surged to a two-year high of 9.5% in May from 8.4% in April, coming in well above the NBU’s forecast and nearly twice as high as its 5.0% target. That said, inflation expectations among businesses and households continued to stabilize, which, coupled with the temporary nature of the inflation rally—with the NBU naming supply-side factors and the base effect as the key drivers—allowed the Bank to maintain relatively accommodative monetary conditions in June. Meanwhile, new Covid-19 strains and the slow pace of the vaccination campaign at home continue to weigh on the economic outlook, further supporting the Bank’s decision. Lastly, the Bank decided to begin phasing out the use of its additional monetary instruments, including long-term refinancing and interest rate swaps, which should also help keep inflation in check.

In the accompanying statement, the Bank struck a rather hawkish tone, stating that it is “is ready to raise its key policy rate further if stronger underlying inflationary pressures and worsening expectations pose a threat to meeting the 5.0% inflation target in 2022”. Against the backdrop of considerable pro-inflationary risks—a quicker-than-expected release of pent-up demand, a prolonged commodity price rally, a sharp deterioration in the terms of trade and a potential escalation of the military conflict, among others—this suggests that a return to monetary policy tightening is possible in the coming months.

Although the majority of our panelists project a 25 basis-point hike to 7.75% by year-end, Andrew Matheny and Tadas Gedminas, analysts at Goldman Sachs, remain more dovish, saying:

“While today’s decision marks a dovish surprise to expectations, the risk of further rate hikes remains. However, given relatively favourable hryvnia developments over the course of last month, the return of foreign capital inflows, and our expectation that inflation will begin to decline from Q3 onwards, we maintain our baseline forecast for no further rate hikes this year.”

The next monetary policy meeting is scheduled for 22 July.

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