Thursday, July 23, 2020

Ukraine maintains rate, sees steady rate until end-year

      Ukraine's central bank left its main interest rate steady after cutting it nine times, living up to its guidance from last month, and said it expects to "keep the policy rate at the current low level at least until the end of the current year."
     The National Bank of Ukraine (NBU) kept its key policy rate at 6.0 percent after cutting it four times this year by a total of 7.50 percentage points and nine times and by 12 percentage points since April 2019.
      The bank's board, chaired by its new governor Kyrylo Shevchenko, said the decision to maintain the key rate would help curb inflation as the economy gradually recovers while leaving room for the cost of credit to decline to single digits.
     "By keeping the key policy rate at 6%, the NBU leaves enough room for monetary stimulus in order to provide the economy with additional impetus for growth if consumer and investment demand recover more slowly than expected," the bank said.
     NBU said its recent rate cuts had not yet been fully transmitted to the economy as banks were still continuing to lower loan and deposit rates, and in order to anchor interest rates in single digits financial markets must be confident economic policy is consistent and there is a reasonable balance between curbing inflation and monetary stimulus.
      "Next year, the NBU will take decisions on the key policy rate taking into account whether or not inflationary risks materialize, how social standards change, and at what pace the economy is recovering," the central bank said.
     It was the first policy decision by the bank's board under Shevchenko who last week took over from Yakiv Smoliy who resigned at the start of this month due to what he said was systematic political pressure, hitting financial markets and sparking concern at the International Monetary Fund (IMF).
     Ukraine's hryvnia fell after Smoliy's shock resignation on July 1 and continued to depreciate until today's policy decision, which sparked a rise in the exchange rate.
     The hryvnia was trading at 27.75 to the U.S. dollar today, up 0.3 percent on the day but down 4.0 percent since the departure of Smoliy. Since the start of the year, the hryvnia is down 15 percent.
      In its June policy decision, when the rate was cut 200 basis points, the central bank said the cycle of rapid monetary easing had come to an end and future decisions would depend on the prospects for inflation.
     Ukraine's inflation rate rose to 2.4 percent in June from 1.7 percent in May and continued to rise in July, the bank said, adding inflationary expectations had also worsened.
     NBU expects inflation to continue to rise gradually to 4.7 percent by the end of this year due to higher energy prices, monetary and fiscal stimulus, and then return to its target range of 5.0 percent, plus/minus 1 percentage point this year in 2021 and 2022.
     Ukraine's economy is recovering from quarantines imposed to curb the spread of the COVID-19 virus but NBU still raised its forecast for the economy to contract by 6.0 percent this year from an earlier forecast of 5.0 percent.
      Ukraine's economy shrank 0.7 percent in the first quarter from the previous quarter but NBU said the low point in growth was in the second quarter and the pace of the recovery will be restrained.
      "Considering the high level of uncertainty over the spread of the coronavirus, both the public and businesses are likely to remain cautious about their consumer and investment decisions," the bank said, adding the slow exit from the crises from other countries will also limit the chances of a more rapid economic recovery.
      In 2021 and 2022 Ukraine's economy will then expand, helped by the monetary, fiscal stimulus and foreign demand, resuming growth at a level of around 4.0 percent.
      NBU said its forecast are based on continued cooperation with the IMF and its support is important for Ukraine to overcome the effects of the pandemic, repay government debt in "due time and in full," maintain access to international capital markets and ensure international investors retain their interest in Ukrainian assets.


     The National Bank of Ukraine released the following press release:


"The Board of the National Bank of Ukraine has decided to keep its key policy rate at 6% per annum. This on the one hand will curb price growth as the economy recovers in 2021–2022, while on the other hand leaving room for further decreasing the cost of credit to one-digit levels.
Inflation is continuing to accelerate gradually, albeit remaining below the 5% ± 1 pp target range. Inflation rose to 2.4% in June, and continued to accelerate in July according to NBU assessments. Inflation was mainly driven by raw food prices, which grew due to unfavorable weather. The inflation expectations of businesses and households have also worsened. At the same time, price growth has been restrained by weak domestic demand, benign FX market conditions, and relatively low energy prices.
Inflation will continue to rise gradually and will return to the 5% +/- 1 pp target range this year.
In H2 2020, inflation will accelerate somewhat (to 4.7% as of the year-end) due to a number of factors – both external and internal. First, the faster price growth will be driven by loose monetary and fiscal policies, which will mitigate the adverse effects of the COVID-19 pandemic, and support consumer demand and business activity. Second, higher energy prices and the lower fruit harvest will affect prices.
Inflation will remain within the target range in 2021–2022.
The economy of Ukraine will contract by 6% in 2020 but will resume growth at the level of around 4% in subsequent years.
The NBU has revised its forecast of how much real GDP will drop in 2020 as a result of the coronavirus crisis, from 5% to 6%. The low-point of the fall was passed in Q2.
In H2 2020, the economy started to recover. With the quarantine restrictions eased, there has been a pickup in business activity. The majority of businesses in the most affected sector – services – have already resumed normal operations. The labor market, although in a worse condition than before the crisis, is showing signs of stabilization. Business activity and private consumption were given additional support by the NBU’s stimuli, loan repayment holidays, tax relief, and increased unemployment allowances from the budget.
However, the pace of economic recovery will be restrained, as consumer and investment demand remain subdued. During the crisis, households significantly cut their spending on non-staple goods, while businesses put their development plans on hold and revised their staffing levels and payroll funds. Considering the high level of uncertainty over the spread of the coronavirus, both the public and businesses are likely to remain cautious about their consumer and investment decisions. The slow exit from the crisis by other countries, including Ukraine’s main trading partners, limits the chances of a more rapid recovery of the economy.
In 2021–2022 the Ukrainian economy will grow, thanks to monetary and fiscal stimuli and higher foreign demand. Economic growth will mainly be driven by private consumption.
In 2020, the current account of the balance of payments will post a surplus for the first time in five years.
The NBU has significantly improved its current account forecast for 2020, from a zero deficit (compared to a deficit of 1.7% of GDP under the old methodology used in the April forecast) to a surplus of 4.4% of GDP.

A significant drop in imports due to falling demand for durable goods, closed borders for travel, and low energy prices will contribute to the current account surplus. Given the stable global demand for food, the pandemic will affect exports less than imports. In addition, the amount of remittances from labor migrants to Ukraine will be larger than expected.
That said, in the years to come, the current account will return to deficit on the back of pent-up consumer and investment demand and the expected decrease in gas transit.

The key assumption of this forecast is that Ukraine continues to cooperate with the IMF, as set forth in the Memorandum of Economic and Financial Policies.

Complying with the terms of a new Stand-By Arrangement with the IMF, including those that require that Ukraine conducts consistent fiscal and monetary policies, will safeguard macroeconomic stability, which is required for a steady and continued economic recovery.

Support from the IMF is important for financing budget expenditures on overcoming the effects of the pandemic, repaying government debt in due time and in full, maintaining access to the international capital markets, and ensuring that international investors retain their interest in Ukrainian assets.

Financing from the IMF and other official international partners will help Ukraine to significantly increase its international reserves. International reserves are expected to rise to about USD 30 billion in 2020, growing to USD 32 or 33 billion in the coming years.

A longer-lasting coronavirus pandemic and the potential return to stricter quarantine measures required to overcome it, both in Ukraine and globally, remain the key risk to this forecast. This could result in a more significant and longer-lasting cooling of both the global and the Ukrainian economy.

Other risks also remain significant. They include:

  • the negative impact of certain court rulings on macrofinancial stability
  • an escalation of the military conflict in eastern Ukraine
  • the higher volatility of global food prices, driven by global climate change and the risk of stronger protectionist measures.

Given the gradually accelerating inflation and the above balance of risks, the NBU Board kept the key policy rate unchanged, at 6%.

The NBU expects to keep the key policy rate at the current low level at least until the end of the current year.

Next year, the NBU will take decisions on the key policy rate taking into account whether or not inflationary risks materialize, how social standards change, and at what pace the economy is recovering.

Previous key policy rate cuts have not been fully transmitted to the cost of financial resources – the banks are still continuing to cut their loan and deposit rates. However, anchoring interest rates at the single-digit level requires that financial market participants be confident that economic policy is consistent and that there is a reasonable balance between inflation curbing and monetary stimulus.

By keeping the key policy rate at 6%, the NBU leaves enough room for monetary stimulus in order to provide the economy with additional impetus for growth if consumer and investment demand recover more slowly than expected.

The decision to keep the key policy rate at 6%, was approved by an NBU Board Decision on the key policy rate – No. 488-D, dated 22 July 2020.

А new detailed macroeconomic forecast will be published in the Inflation Report on 30 July 2020.

A summary of the discussion between Monetary Policy Committee members that preceded the approval of this decision will be published on 3 August 2020.

The next monetary policy meeting of the NBU Board will be held on 3 September 2020, according to the confirmed and published schedule."

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