Ukraine's central bank held its benchmark discount rate steady at 30.0 percent to consolidate the positive developments in the money market and stabilize inflationary expectations but added it would soften monetary policy in the near future if inflationary risk subside.
The National Bank of Ukraine (NBU), which last month said it was looking forward to loosening its policy in the near future as the hryvnia's exchange rate stabilizes, welcomed the decline in inflation to 58.4 percent in May from April's 60.9 percent along with narrower fluctuations in the hryvnia's exchange rate and a return of deposits to the banking system.
"Given the stability in the money market and low aggregate demand, the Committee expects continued deceleration of inflation the coming months," the NBU said.
The NBU raised its rate by 16 percentage points this year, most recently in March, and by a total of 23.50 points since April 2014 to protect the value of the hryvnia and curb inflationary pressures.
A plunge in the hryvnia's exchange rate in early February, along with higher rates for housing and some communal services, pushed up inflation sharply, leading the central bank to forecast that inflation would end this year at 48 percent and the International Monetary Fund sees the year ending with inflation at 46 percent.
But the central bank now expects inflation to steadily decline in coming months and reach 12 percent by the end of 2016 as the impact of the devaluation of the hryvnia subsides, prices on world markets remain low, economic activity is below potential and monetary and fiscal policy stays tight.
Last year the hryvnia depreciated almost 50 percent against the U.S. dollar following the outbreak of armed conflict in Eastern Ukraine and the occupation of the Crimean peninsula by pro-Russian forces.
But a cease-fire agreement in late February, rate hikes and administrative measures by the central bank helped put a floor under the hryvnia and today it was trading at 21 to the dollar, largely stable since early March but still down 25 percent this year.
Ukraine's economy has been shrinking since the first quarter of 2014 and its Gross Domestic Product contracted by 5.3 percent in the first quarter of this year from the previous quarter for annual contraction of 17.2 percent, up from 14.8 percent in the fourth quarter of 2014.
Based on the expectation that the truce in the Donetsk and Luhansk regions will hold and business recovers, the central bank expects the economy to slowly recover from the third quarter of this year.
However, this year's GDP is still expected to drop by 9.5 percent, up from 2014's fall of 6.8 percent, before recovering in 2016 to expand by 3.0 percent, the NBU said.