The National Bank of Ukraine (NBU) has left its key policy rate unchanged at 14% per annum in order to mitigate risks for inflation targets in 2017-2018, the regulator said on March 2.
Inflation in Ukraine slightly accelerated (to 12.6% year-on-year) in January, which was attributed by the central bank to higher production costs, in particular, labour costs, rising global commodity prices, including oil and food prices, and the weakening of the hryvnia national currency in late 2016 and early January 2017.
"It is expected that inflation will accelerate further in annual terms in February 2017, primarily due to base effects," the NBU underlined in a statement, adding that the regulator's targets for 2017 and 2018 (8%+/-2 ppts and 6%+/-2 ppts, respectively) remain "within reach".
Earlier, the NBU was forced to revise its inflation forecast upward from 8% to 9.1% in 2017. The move was attributed primarily to the minimal wage rise increase to UAH3,200 (€110), which took effect from the beginning of the year.
Annual inflation is projected to remain high in the first three quarters due to statistical base effect. It will return to single-digit level only in the fourth quarter of 2017, the NBU believes.
"The projected demand-pull pressure on prices will be contained by the NBU's prudent monetary policy," the regulator added. "However, the risks to further inflation developments have increased since the previous monetary policy meeting, prompting the NBU to continue a pause in its monetary policy easing cycle."
Specifically, the major risks include intensification in hostilities and a transport blockade in the east of Ukraine. If lasting for a prolonged period, these developments will lead to the ultimate disruption of production and supply chains and, thus, to a reduction in steel and coke output, as well as mining and electricity production, according to the NBU.
Recent developments are also seen to pose risks to the inflation forecast through a negative impact on the balance of payment. "A possible contraction in metallurgical exports and higher coal imports could adversely affect the current account balance. Consequently, this will have negative implications for the interbank FX market," and inflation expectations may worsen, the central bank said.
"Given the aforementioned risks and the need to achieve the inflation targets, the NBU decided to retain its policy rate unchanged at 14%," the statement said.
A group of pro-government veterans of the Donbas conflict announced in December their intention to block trade with coal-producing eastern parts of the country, controlled by Russia-backed rebels, in protest at smuggling in the region. The blockade led to acute shortages of anthracite coking coal, which accounts for one third of all electricity generated in the country.
On February 15, the Ukrainian government imposed temporary emergency measures in the national energy sector. Earlier, Deputy Prime Minister Hennadiy Zubko said the government could impose rolling blackouts in several regions due to the shortages.
According to Prime Minister Volodymyr Groysman, the Ukrainian steel industry generates 12% of GDP and 20% of foreign exchange earnings in the country. "If [the industry] stops, this would undermine the exchange rate of the national currency," he said on February 23.
On March 2, the NBU's governor Valeriya Gontareva said that "under the most pessimistic scenario" Ukraine's GDP in 2017 will fall 1.3 percentage points to 1.5% y/y if the Donbas blockade lasts until the end of this year, Interfax news agency reported.
GDP growth in October-December accelerated to 4.7% year-on-year compared with 2% y/y growth in the third quarter. In late January, the NBU revised its economic growth forecast for the country to 2.8% year-on-year in 2017 and 3% y/y in 2018 (from 2.5% y/y and 3.5% y/y, respectively), to follow the estimated 1.8% y/y growth in 2016 (still to be confirmed).
The European Central Bank (ECB) President Mario Draghi said on March 8 that the Eurozone’s central bank will seek clarity on what role the Latvian central bank governor Ilmars Rimsevics has ... more
The Azerbaijani government has finished taking over $2.2bn worth of external debt owned by the country's largest bank, International Bank of Azerbaijan (IBA), APA news agency reported on March 5 ... more
As Iran gets closer to Persian New Year’s Day (March 21), the great numbers of people wanting to travel abroad for the holidays are becoming increasingly anxious about the apparent evaporation of ... more