Thursday, May 28, 2015

Ukraine holds rate but looks to cut when FX stabilizes

    Ukraine's central bank maintained its benchmark discount rate at 30 percent to help stabilize the the domestic money and foreign exchange markets but is looking towards loosening its policy in "the near future" as the hryvnia's exchange rate stabilizes.
   The National Bank of Ukraine (NBU), which has raised its rate by 16 percentage points this year and by a total of 23.50 percentage points since April 2014, said a stable money market would help restore the monetary transmission mechanism and thus enable banks to provide lending to underpin growth should monetary policy be loosened.
    Members of the central bank's monetary policy committee "raised concerns over the Ukrainian economy sliding into a protracted recession," noting that the output of key sectors shrank by 23.4 percent in April and "heightened risks" that the economy would slow down dramatically.
    However, the NBU added that the current level of the discount rate would "help ensure a firm downward path of inflation and encourage the return of household deposits to the banking system."
    In April the stock of hryvnia deposits by households rose by 4.2 billion, a sign that the public confidence in the banking sector was "gradually being restored."
    Ukraine's hryvnia started falling in February last year after pro-Russian forces occupied the Crimean peninsula and continue to tumble as armed conflict broke out in Eastern Ukraine.
    In 2014 the hryvnia depreciated by almost 50 percent against the U.S. dollar but following a cease-fire agreement in February this year, rate hikes and a series of administrative measures by the central bank, the hryvenia started stabilizing.
    Today the hryvnia was trading at 21.22 to the dollar for a 26 percent decline since the start of this year but much stronger than its low of 33.7 in mid-February. Compared with the start of 2014, the hryvenia has lost 61 percent of its value.
    The NBU said the official UAH/USD exchange rate had fluctuated within a range of 21.4 to 23.5 throughout April and then in May by a narrower range of 20.6 to 20.8 to the dollar.
    Inflation, however, has continued to accelerate, hitting 60.9 percent in April from 45.8 percent in March, boosted by an increase in utility and natural gas tariffs but also by "peculiarities" in the collection method used the statistics office, the central bank said.

    Instead of reacting to the current inflation rate, the NBU said it was taking a forward-looking approach that takes into account inflation expections and it expects inflation to slow down considerably over the next 12 months.
    Ukraine's economy shrank by an annual 17.6 percent in the first quarter of this year, the fifth quarter in a row of contraction. In 2014 Ukraine's Gross Domestic Product fell by 6.8 percent and the International Monetary Fund has forecast a decline of 5.5 percent this year.
    Earlier this month Ukraine's parliament adopted a bill that would strengthen the central bank's independence and institutional capacity.

    The National Bank of Ukraine issued the following statement:

"On May 27-28, 2015, the Monetary Policy Committee of the National Bank of Ukraine (hereinafter – the Committee) held its regular meeting.

The meeting discussed the possible scenarios for future economic and monetary developments and considered the expediency of changing the parameters of monetary instruments.

The Committee members pointed to the sustained positive trends in the money market. In April-May, in particular, the impact that the behavioural factor had on the exchange-rate path was significantly limited, amid the gradual appreciation of the hryvnia. Thus, the official UAH/USD exchange rate fluctuated within the range of UAH 21.4 – 23.5 per USD 1 throughout April, while in May it moved within the range of UAH 20.6 – 20.8 per USD 1.

The public confidence in the banking sector was gradually being restored. In April 2015, the stock of household hryvnia deposits increased by UAH 4.2 billion.

At the same time, consumer inflation accelerated sharply (to 60.9% year-on-year in April). The spike in inflation was driven by increases in utility and natural gas tariffs. The high CPI figure was also attributed to peculiarities of the data collection procedure of the State Statistics Service of Ukraine.

The Committee members pointed out that the National Bank of Ukraine should take a forward-looking approach by using the available instruments to provide an adequate response consistent with the projected inflation path, taking into account inflationary expectations of households and businesses, rather than responding to the current inflation rate.  After hitting its peak, inflation is expected to slow down considerably over the next 12 months.

The Committee members present at the meeting noted the monetary policy should focus on restraining the second-round effects of inflationary shocks that had already materialized.

The Committee members raised concerns over the Ukrainian economy sliding into a protracted recession: the annual rate of decline in the index of key sectors output deepened to 23.4% in April 2015. Accordingly, heightened risks remained that the economy would slow down dramatically.  

Under such macroeconomic conditions, the shared opinion of the Committee members is that the major contribution that monetary policy can make to the economic recovery is to put the money market, notably its foreign exchange segment, back on track. This microfinancial stabilization will help restore an efficient monetary transmission mechanism and enable the banking system to provide lending to the economy to underpin growth, should the National Bank of Ukraine loosen the monetary policy.

In view of the above, and given the need to put the money market firmly on the path to stabilization, the Committee members concurred in the expediency of keeping the discount rate at 30%.

This level of the discount rate will help ensure a firm downward path of inflation and encourage the return of household deposits to the banking system.

As the risks to the hryvnia stability subside, it raises the prospects of the monetary policy stance being loosened in the near future."


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