Ukraine's central bank maintained its benchmark discount rate at 30.0 percent to avoid triggering any devaluation of the hryvenia currency, raising inflation or destabilizing the money market.
The National Bank of Ukraine (NBU), which has raised its rate by 16 percentage points this year and by 23.50 points since April 2014, said it intends to gradually reduce its discount rate but this process depends on the successful implementation of structural reforms, fiscal consolidation and a recovery of the banking system.
In a statement issued today based on a meeting by the NBU's monetary policy committee on March 25 and 26, the central bank also agreed under its Fundamentals of monetary policy for 2015 to transition to inflation targeting with the aim of achieving annual consumer price inflation of 5.0 percent, with a tolerance range of plus/minus one percentage point, in three to five years.
The policy committee also approved the inflation report, forecasting a decline in Gross Domestic Product of 7.5 percent this year, up from 2014's contraction of 6.8 percent, with a gradual recovery of growth in the second quarter of the year due to an increase in net exports. First quarter growth is expected to be impacted by the military conflict with Russia.
Investment should start to rise in the second half of this year due to the increasing impact of import substitution and the need to rebuild infrastructure in the eastern part of the country.
For 2016 the economy is forecast to contract by 3.0 percent.
Due to a depreciation of the real effective exchange rate of the hryvnia in 2014 of 19.2 percent, and 2.4 percent this year, Ukraine's current account deficit is expected to decline to about 1.0 percent in 2015 and 2016, with a recovery of international reserves to US$18 billion based on a significant amount of official financing, for example from the International Monetary Fund (IMF), and the expected postponement of payments on sovereign eurobonds.
Based on the devaluation of the hryvnia, along with a significant rise in tariffs for housing and communal services, consumer price inflation is forecast to end this year at 30 percent.
For 2016 headline inflation is seen dropping to 13 percent and core inflation to 8 percent.
In February Ukraine's consumer price inflation rate rose to 34.5 percent from 28.5 percent the previous month while GDP contracted by 3.8 percent in the fourth quarter from the third quarter for annual shrinkage of 14.8 percent, up from a decline of 5.4 percent in the third quarter.
The hryvnia tumbled in early February, hitting a low of 33.7 to the U.S. dollar on Feb. 26, but since then it has rebounded to trade around 23.3 today, but is still down 32 percent this year.