Thursday, March 14, 2019

Ukraine holds rate, switch to easing depends on inflation

     Ukraine's central bank kept its policy rate at 18.0 percent due to risks that inflation may not decline but said it may adopt a monetary easing cycle in the future and how soon depends on how steadily the risks of inflation ease and inflation expectations improve.
     "Looking ahead, any changes to the key policy rate will be based on the NBU's updated macroeconomic forecast that will be published in April," the National Bank of Ukraine (NBU) said.
    Ukraine's central bank moved into a monetary tightening cycle in October 2017 and raised rates 6 times by a total of 550 basis points until September 2018. Since then rate has been unchanged.
     But despite tight monetary condition, which helped boost the hryvnia's exchange rate, inflation remained above the NBU's end-2018 target of 6.0 percent, plus/minus 2 percentage points, due to an array of  factors such as higher administered prices and pensions, higher tariffs and oil prices, along with strong consumer demand and higher wages.
     By the end of 2018 headline inflation had only eased to 9.8 percent but in the last two months inflation has fallen and reached 8.8 percent in February, "signifying that the underlying inflationary pressure is easing off as anticipated," NBU said.
     However, the central bank said continued tight monetary conditions are still an important prerequisite for gradually lowering inflation to its target of 5.0 percent in 2020.
     In its January inflation report, NBU forecast inflation would ease to 6.3 percent by the end of 2019 and then decline to the upper bound of its target range of 5.0 percent, plus/minus 1 percentage point, early next year before reaching the midpoint target by the end of the year.
     NBU said this forecast still holds although an increase in social payments and higher utility tariffs are planned, which could boost inflation expectations. On the other hand, the hryvnia's has strengthened more than expected, helping curb inflation.
     Administered prices are set to rise 13.6 percent this year, mainly due to an increase in natural gas tariffs for households as part of the agreement with the International Monetary Fund. (IMF). In the medium term, the rise in administered prices slows to 10 percent in 2021.
     Since September last year the hryvnia has steadily strengthened and today it was trading at 26.88 to the U.S. dollar today, up 2.4 percent this year.


     The National Bank of Ukraine issued the following statement:

"The Board of the National Bank of Ukraine (NBU) has decided to keep its key policy rate at 18.0% per annum. The tight monetary conditions continue to be an important prerequisite for gradually reducing inflation to the 5% target in 2020.

Inflation continued to decelerate in the early months of 2019, effectively staying on the trajectory the NBU predicted in itsJanuary 2019 Inflation Report.  By the end of February, inflation had declined to 8.8% yoy, with core inflation down to 7.8% yoy, signifying that the underlying inflationary pressure is easing off as anticipated.

 The NBU’s tight monetary policy contributed to the lower inflation, including by being one of the reasons for the strengthening of the hryvnia. The stronger hryvnia affected the prices of imported goods and goods that have a substantial import content, which along with other factors brought core inflation down.

In addition, the consistency of the monetary policy, which aims to tackle inflation, and the FX market conditions contributed to the gradual improvement of inflation expectations. This raises interest rates in real terms[1] and thus ensures tight monetary conditions necessary to reduce inflation.

In January the NBU projected that inflation will decelerate to 6.3% in 2019 and return to the target range of 5% ± 1 pp early next year.

The January forecast still holds although new factors emerged since the NBU Board last met to discuss monetary policy.

On the one hand, increases in social payments, as well as the monetization of utility subsidies are planned for the coming months. Although the effects of these individual factors are insignificant, their combined impact on inflation expectations could be substantial, on the back of greater uncertainty arising from the presidential and parliamentary elections.

On the other hand, a more noticeable strengthening in the hryvnia exchange rate than is envisaged in the current forecast, is helping curb inflation.

That said, the risk that inflation may not decrease mentioned by the NBU in its January macroeconomic forecast continues to persist.

After balancing the need to bring inflation back to its target against the risks that could prevent inflation from decreasing, the NBU Board decided to leave the key policy rate unchanged, at 18.0% per annum.

Although leaving the key policy rate unchanged, the NBU Board said that it could cut it in the future. How soon the NBU will adopt an easing cycle will depend on how steadily risks of inflation decrease and inflation expectations improve. Looking ahead, any changes to the key policy rate will be based on the NBU’s updated macroeconomic forecast that will be published in April.

The decision to keep the key policy rate at 18.0% was approved by NBU Board Policy Rate Decision No., dated 14 March 2019.

A summary of the discussion by Monetary Policy Committee members that preceded this decision will be published on 25 March 2019.

The next meeting of the NBU Board on monetary policy issues will be held on 25 April 2019 as scheduled."


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