Thursday, September 15, 2016

Ukraine cuts rate 50 bps, to cut more if inflation drops

    Ukraine's central bank cut its key policy rate by a further 50 basis points to 15.0 percent, as expected, and confirmed that it would continue to ease its monetary policy stance to boost economic activity if the risks to inflation continue to abate.
     But the National Bank of Ukraine (NBU) also sought to dampen expectations of a major easing in the future, saying "in the view of uncertain as to external market situation, the NBU maintains sufficiently restrained monetary conditions."
    The NBU has now cut its rate by 700 basis points this year and by 1,500 points since starting its easing campaign in August last year in response to declining inflationary pressures amid a more stable exchange rate of the hryvnia.
   Ukraine's inflation rate rose slightly to 8.4 percent in August from 7.9 percent in July, but the central bank said this was in line with its July inflation report and pressure on inflation continued to ease, evidenced by slower core inflation and reduced inflation expectations.
    The NBU forecast that inflation will approach 12 percent in the fourth quarter of this year - an increase from current levels but a sharp fall from 60.9 percent seen in April 2015 - due to higher tariffs from public utilities with core inflation continuing to decline due to weak demand.
     Ukraine's hryvnia came under severe 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.
    The hryvnia started out 2016 on a weak footing but then firmed from mid-March to mid-August. 
Since then it eased again and was trading at 26.3 to the dollar today, down 8.7 percent this year.
    The central bank said an increase in exchange rate volatility in August and September had not raised the risk of inflation exceeding its targets and it had not altered the dominant trends in the foreign exchange market but merely smoothed out any sharp fluctuations.
    The NBU targets inflation of 12 percent, plus/minus 3 percentage points for 2016, and 8.0 percent, plus/minus 2 points in 2017.
    After nosediving in 2014 and the first half of 2015, Ukraine's economy has been slowly getting back on its feet and Gross Domestic Product expanded by 0.6 percent in the second quarter of this year from the first quarter for annual growth of 1.3 percent, up from 0.1 percent in the first quarter.
    On Wednesday the International Monetary Fund completed its second review of Ukraine's four-year economic recovery program from March 2015, enabling the fresh payment of US$1 billion, bringing total payments under the arrangement to US$7.62 billion of a targeted $17.5 billion.
    The NBU noted that the successful review by the IMF shows that the country "is on the right way to recovery of sustainable economic growth."
    It its statement, the IMF said that Ukraine's monetary policy had been "skillfully managed" and a reform of the financial sector was starting to yield results. Reducing inflation and rebuilding international reserves should continue to remain a priority along with removing administrative measures.

    The National Bank of Ukraine issued the following statement:

"The Board of the National Bank of Ukraine has decided to cut the key policy rate to 15%, effective from 16 September 2016. Monetary policy easing was due to further alleviation of risks to price stability, which is consistent with inflation targets set at 12% +/-3% for 2016 and 8% +/-2% for 2017. 

Consumer prices dynamics during last months kept pace with the forecast appeared in the July 2016 Inflation Report. Therefore, inflation made 8.4% y-o-y in August. 

Pressure on inflation driven by fundamental factors continued to ease. This is evidenced by further slower core inflation to 7.4% y-o-y. As originally purposed, it was due to low aggregate demand,  large supply of food products and restrained monetary policy.  Apart from this, inflation expectations also further improved both for households, business and expert community.

Economic activity gradually keeps on recovering: GDP growth accelerated to 1.3% y-o-y in Q2. Higher Index of Key Sectors Output (IKSO) remained set to 1.7% y-o-y in July. At the same time by estimates of the NBU, private consumption contribution to economic growth remained low and did not generate additional pressure on inflation despite high growth of real wages during the last months.

Inflation will approach the level of 12% y-o-y in Q4 2016. Mainly, it will take place due to reflection of higher tariffs for public utilities in statistics. Core inflation will continue to moderate by showing further weaker fundamental pressure on inflation, according to the NBU estimates.  

Higher volatility of exchange rate, which took place in August-September, did not create risk for inflation to exceed targets (12% +/-3% for 2016 and 8% +/-2% for 2017). As before, NBU did not impair dominant trends in FX market and smoothed out sharp exchange rate fluctuations through FX interventions, at the same time. 

Completion of the second programme review under the Extended Arrangement will become an important factor for improvement of expectations, source of financing for country and a sign for both national and external investors that our country is on the right way to recovery of sustainable economic growth. Also, larger exports of grain and other agricultural crops due to high yield will set off recent decline in global markets prices. 

But in the view of uncertainty as to external market situation, the NBU maintains sufficiently restrained monetary conditions. 

In the event of a further risks mitigation for price stability the NBU will continue easing the monetary policy to support economic growth recovery.

The decision to cut the key policy rate to 15% is approved by NBU Board Decision No. 277-рш, dated 15 September 2016, On the Key Policy Rate.   

The next meeting of the NBU Board on monetary policy issues will be held as scheduled on 27 October 2016."


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