Ukraine’s central bank is likely to raise interest rates for the third time this year at its monetary policy meeting later this month after consumer price inflation (CPI) jumped by 1.9% m/m in September.
Ukraine’s consumer prices were driven higher by clothing and food, the State Statistics Service reported on October 9. Annual inflation, however, dropped very slightly to 8.9% y/y from 9.0% y/y in August.
The National Bank of Ukraine (NBU) has been battling to bring down inflation since the economy went into meltdown in 2015, that came with an inflation-inducing deep devaluation of the hryvnia. Inflation reached a peak of 60.9% in April 2015 but has been falling since then thanks to extraordinarily high interest rates. Inflation fell into single digits only this June, after the NBU hiked rates twice this year. The month-on-month increases in inflation have been around 1% or less for most of this year, but the 1.9% in September represents a worrying spike and could lead the NBU to hike rates again. Currently the NBU prime rate is an already high 18%.
Prices always climb in the autumn in Ukraine. Clothing and footwear prices surged 8.6% m/m (after a 2.6% m/m decline in August), mostly due to the more expensive items in the colder autumn season. A 6.4% depreciation of the national currency during August-September also added to clothing price growth due to the high share of imports in this goods category.
Food prices grew 1.6% m/m (after a 0.6% m/m decline in August), mostly due to a seasonal increase in the prices for eggs (14.1% m/m), bread (3.3% y/y), meats (2.8% m/m), and milk (2.7% y/y). At the same time, prices for fruits and vegetables continued to decline, falling by 2.9% m/m and 1.5% y/y, respectively.
In addition, prices for transportation added 2.8% m/m (after a 1.5% m/m rise in August), mostly due to a fuel price surge. Prices in education swelled 10.0% m/m with the beginning of the school year.
Core inflation (the consumer basket excluding goods and services with the most volatile prices) also jumped 1.9% m/m in September, accelerating from 0.1 m/m growth in August. Annual core inflation stayed unchanged at 8.7% y/y.
“The September surge might cause consumer inflation to exceed the National Bank’s forecast of 8.9% y/y, given the expected price increase for housing and utilities in October-November and continuing food price growth. This inflation trend, combined with the lack of full certainty on IMF financing, will likely prompt the NBU to resort to another hike of its key policy rate at its October 25 meeting,” Evgeniya Akhtyrko of Concorde Capital said in a note. “Our current projection of 2018 consumer inflation coincides with the NBU's forecast of 8.9% y/y.”