The National Bank of Ukraine (NBU) will leave the refinancing rate unchanged at 22% to restrain monetary policy and mitigate mounting risks to price stability triggered by turbulence in the global economy.
The move announced on January 28 will also enable the NBU to achieve its objective of lowering consumer inflation to 12% by the end of 2016 and 8% by the end of 2017. In the second half of 2015, consumer inflation was on a firm downward path, moderating to 43.3% in annual terms, which was broadly in line with NBU projections. Core inflation continued to decline to 34.7% y/y.
"The subdued domestic demand, NBU’s restrained monetary policy, and stabilisation of inflation expectations have contributed to the easing of inflationary pressures in the last months of the year," the bank's statement reads.
The regulator also revised its 2016 outlook for economic activity downward, forecasting real GDP growth at 1.1% y/y. "A weaker-than-previously expected economic recovery can be attributed to lower-than-expected global commodity prices, deteriorating global economic growth prospects, and fresh trade restrictions imposed by Russia, including a ban on the transit of Ukrainian goods through its territory," the NBU believes.
Kyiv implemented a ban on imports of selected Russian food items on January 10 to last until August 5 or until Russia lifts its own embargo on Ukrainian food products. Affected foodstuffs and beverages include bread and bakery products, chocolates, cookies, cattle meat, fish, roasted coffee, black tea, baby food, filter cigarettes, beer and vodka. The Ukrainian government later announced its intention to expand the list of banned Russian items.
The regulator said a further decline in inflation expectations, cancellation of a temporary surcharge on imports, as well as low global energy and food prices, all support the downward trend in inflation.
On the other hand, "a sharper decline in inflation will be restrained by further upward adjustments in administrated prices", the NBU statement noted.
Major downside risks to the inflation forecast and consequently the achievement of the bank's 2016 inflation objective include "external factors that determine the balance of payments and the exchange rate path of the hryvnia".
According to local media reports, the NBU sold $161.3mn from the start of the year to January 25 in order to stabilise the hryvnia domestic currency.
According to the bank's recent forecast, the current account deficit will reach $2.5bn, or 3% of GDP in 2016. "Should downside risks materialise, this deficit could be higher, which in turn would adversely affect the path of inflation. These downside risks primarily include falling global prices for key Ukrainian export commodities. Second, downside risks may arise from depreciation of the currencies of Ukraine's trade partner countries," the NBU said.
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