The National Bank of Ukraine (NBU), which cut its rate by 800 basis points in 2015 following hikes totaling 2,350 points from April 2014 through March 2015, added that it intends to resume a gradual easing of monetary policy but if risks to inflation materialize it will "be forced to keep a prudent monetary policy in place for a longer period to achieve its inflation objectives."
In its previous statement from January, the central bank also said that it may have to maintain what it describes as a "prudent" stance if inflationary risks arise, but added today that a condition for lower risks to inflation come from a restoration of political stability, that the IMF program is brought back on track and that conditions for Ukrainian exports become more favorable.
Last month the central bank's governor, Valeriya Gontareva, told Ukraine's parliament that political instability, including the sudden resignation of the economy minister, had put pressure on the hryvnia.
A few days later, on Feb. 10, Christine Lagarde, managing director of the International Monetary Fund, said she was concerned about the country's progress in improving governance and fighting corruption and without "substantial new" efforts it was hard to see how an IMF-supported program could continue and be successful.
"Ukraine risks a return to the pattern of failed economic policies that has plagued its recent history," Lagarde said.
Ukraine's headline inflation rate eased further to 40.3 percent in January from 43.3 percent in December to the lowest since February 2015, broadly in line with the NBU's projections and consistent with its expectation that inflation will continue to decelerate to 12 percent by the end of 2016 as domestic demand remains subdued.
The central bank added that it was maintaining its forecast for inflation to fall to 12 percent by the end of this year and then to 8.0 percent by end-2017 so its mid-term targets remain within reach.
In addition to sluggish economic growth, low global prices for energy and food will support the downward trend in inflation though a planned increase in administered prices will limit a sharper decline in inflation, the central bank said.
Volatile financial markets in January and February, including a fresh plunge in the hryvnia's exchange rate, had a limited impact on inflation as central bank measures helped smooth the fall in the exchange rate, the central bank said.
The hryvnia came under pressure in February 2014 following political unrest, the annexation of Crimea by Russia and armed conflict in Eastern Ukraine. Last year it lost 24 percent against the U.S. dollar although capital controls and rate hikes by the central bank slowed its fall.
It continued to fall in January until late February, and since then it has firmed.
It rose in response to the central bank's decision today, quoted at 25.8 to the dollar, up from 27.1 at the end of last week but still down 7 percent since the start of 2016.
The National Bank of Ukraine issued the following statement:
"The Board of the National Bank of Ukraine has decided to leave the discount rate unchanged at 22% per annum. The NBU Board’s decision to keep a prudent monetary policy in place aims to stave off any adverse impacts that domestic political instability and global economic turbulence could have on the Ukrainian economy. The decision to keep interest rates unchanged is consistent with the NBU’s objective of lowering headline inflation to 12% by the end of 2016 and 8% by the end of 2017.
In January 2016, headline inflation stood at 0.9% m-o-m and was broadly in line with the NBU’s inflation projections for the month. January's price developments were consistent with the projected disinflation path, envisaging moderation of headline annual inflation to 12% by the end of 2016. Core inflation continued to moderate, standing at zero in January. According to preliminary estimates of the State Statistical Service based on a ten-day monitoring of price developments, annual headline inflation remained low in February 2016.
In recent months, inflationary pressures have been dampened by the NBU’s commitment to prudent monetary policy and subdued domestic demand.
The heightened exchange rate volatility observed in January-February 2016 had a relatively limited impact on the inflation rate. Thanks to the measures taken by the NBU to smooth excessive exchange rate volatility, the hryvnia depreciated in a gradual manner, thus having a limited impact on the inflation rate.
The NBU deems it appropriate to keep its headline inflation projection unchanged at 12% by end-2016 and 8% by end-2017. Accordingly, the NBU confirms that its pre-announced mid-term inflation targets remain within reach.
Sluggish economic growth, which will continue to weigh on consumer demand, is one of the key factors that will keep inflation firmly on a downward trend in 2016. Low global prices for energy and food are among other factors supporting the downward trend in inflation.
At the same time, a sharper decline in inflation will be restrained by the planned upward adjustment of administered prices, which is already reflected in the NBU’s inflation forecast.
The major downside risks to the inflation forecast and, consequently, the achievement of the NBU’s 2016 inflation objective include both external and domestic factors that determine the balance of payments performance, the exchange rate path of the hryvnia, and inflation expectations. While the global markets see tentative signs of stabilizing for prices for key Ukrainian export commodities, other risks are growing. First, it takes a longer time for exporters to shift their focus to new sales markets and find new transport routes for the delivery of their goods. Second, Ukraine faces risks stemming from domestic political turbulence, delays with the resumption of cooperation with the International Monetary Fund, and, consequently, further delays to disbursements of official financing.
In view of the abovementioned risks and the NBU’s commitment to its price stability objective, the NBU deems it necessary to maintain the current monetary conditions.
Going forward, provided that inflationary risks subside, the NBU intends to resume the gradual easing of monetary policy. This can primarily be achieved provided that political stability is restored in the country, Ukraine brings the IMF program back on track, and as long as there are more favorable external conditions for domestic exports. At the same time, should these risks materialize, the NBU will be forced to keep a prudent monetary policy in place for a longer period to achieve its inflation objectives.
The decision on the discount rate is approved by NBU Board Resolution No. 135, dated 3 March 2016, On Money Market Regulation.
The next meeting of the NBU Board on monetary policy issues will be held on 21 April 2016, as scheduled."