Ukraine central bank keeps key rate unchanged at 17%

Ukraine central bank keeps key rate unchanged at 17%
The National Bank of Ukraine (NBU) kept its key policy rate unchanged at 17% / bne IntelliNews
By bne IntelliNews May 24, 2018

The National Bank of Ukraine (NBU) kept its key policy rate unchanged at 17% due to the fact that "the current monetary conditions are sufficiently tight to bring inflation to its medium-term target", the regulator said in a statement on May 24.

The move followed the central bank's April decision to keep its key policy rate unchanged. In March, the regulator increased its key policy rate by 1 percentage point (pp) to 17% .

According to the NBU, inflation continued to decline in April-May 2018, as projected by the central bank. Specifically, headline inflation decelerated to 13.1% year-on-year last month. "This was a minor deviation from the NBU’s latest forecast, caused by the most volatile components and likely to vanish in the coming months," the regulator's statement reads.

"In line with the NBU’s preliminary estimates, inflation is expected to decrease markedly in May, reflecting both statistical base effect and a significant drop in food prices. The NBU’s tight monetary policy continued to contain the underlying inflationary pressure," the regulator added.

Ukraine's core inflation stood at, at 9.4% y/y in April.

The NBU forecasts that headline inflation will reach 8.9% as of the end of 2018 and will return to its target range in mid-2019. "This will be further driven by the monetary conditions, which are already sufficiently tight," the statement reads.

At the same time, this forecast will remain relevant "only if its key assumption materialises", which is the sustained progress in structural reforms, particularly under a $17.5bn support programme agreed between Kyiv and the International Monetary Fund (IMF) in 2015.

"These reforms are critical for both maintaining the macro financial stability and ensuring the long-term economic growth in Ukraine," the NBU added. "The near future will be crucial for taking decisions that are important for extending cooperation with Ukraine’s official lenders. "

The need for Ukraine-IMF cooperation has become "stronger" as developing countries’ access to the global capital market is narrowing. Borrowing costs are rising for these countries amid the US dollar appreciation, increased geopolitical tensions, and risks of trade wars, the regulator underlined.

Recently, the IMF said that the establishing of an independent anti-corruption court is a "crucial" condition for a new tranche.

"We are still looking to complete the fourth review of the IMF's supported programme for Ukraine, and as we've signalled before, we think more progress needs to be made on a number of fronts before we can conclude that fourth review," the lender's communications head Gerry Rice told journalists on May 18. [These] issues include the energy sector... fiscal policy. An approval of the appropriate law setting up a strong and independent anti-corruption court; and on the latter, it's crucial."

The NBU's board believes that, conditional on the materialisation of baseline scenario assumptions the current monetary stance is tight enough to reduce inflation over the medium term.

However, if risks to lower inflation and macrofinancial stability rise, including due to a lack of progress in structural reforms and access to official financing, the NBU "may hike the key policy rate to the level sufficient to drive inflation back to the established medium-term targets".

 

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