NBU Hints at Easing of Monetary Policy, Leaves Key Rate at 18%

04 Февраля 2019

The National Bank of Ukraine left its main refinancing rate unchanged at 18.00% after its board meeting on Jan 31, according to an official statement that said the rate was held at the same level in order to push inflation down toward the target of 5% in 2020. The NBU has been holding its key rate at 18.00% since last September, when the rate was raised from 17.5%. The central bank said that the reversal of the domestic economy’s trend for rising inflation seen since 2017 had been primarily due to the tight monetary policy and that the series of interest rate hikes that started in October 2017 had increased the attractiveness of savings. In full-year 2018, consumer price inflation declined to a 5-year low of 9.8% (down from 13.7% in 2017).
As before, the NBU expects inflation to decline to 6.3% at year-end 2019 and reach 5.0% at the end of 2020.
Inflation is expected to be curbed by:
●      prudent fiscal policy driven by the need to repay large volumes of public debt in 2019–2020
●      slower wage growth, as domestic wages converge with wages in neighboring countries and migration declines
●      relatively low exchange rate volatility resulting in low imported inflation
●      a decrease in energy prices in the global markets
●      weak growth in raw food prices.
Meanwhile the further planned increases in administered prices (including natural gas price for households), which are required to bring them to market levels, will continue to impact consumer price inflation.  

The NBU’s refusal to ease its tight monetary policy well in advance of the March presidential election should be viewed as a positive sign of the central bank’s independence from political considerations and influence by the presidential administration, which surely would have preferred a reduction in interest rates. In January new NBU governor Yakiv Smoliy hinted that bank’s board was considering an easing of policy, but the primary effects of any such easing will not be felt for a few months. We think that the key refinancing rate is now at its peak and that it will decline by between 100 and 300 basis points by the year-end. A major assumption for the macroeconomic forecast is that Ukraine will continue to cooperate with the IMF and enjoy relatively favorable access to international capital markets.

Eavex Capital welcomes any questions or comments you may have regarding our research products.
Please contact our office in Kyiv at 380-44-590-5454, or by email:

Alexander Klymchuk, Head of Sales, a.klymchuk@eavex.com.ua
Dmitry Churin, Head of Research, d.churin@eavex.com.ua