Ukraine NBU surprise hike key policy rate by 1 pp to 17%

Ukraine NBU surprise hike key policy rate by 1 pp to 17%
The National Bank of Ukraine (NBU) will increase its key policy rate by 1 percentage point (pp) to 17%
By bne IntelliNews March 1, 2018

The National Bank of Ukraine (NBU) will increase its key policy rate by 1 percentage point (pp) to 17% from March 2, which is the fourth consecutive increase in the key police rate.

The move is reasonable as inflation risks in Ukraine do not tend to subside, the regulator said in a statement published on March 1."The hike is aimed at lowering headline inflation to meet the target over the medium term," the regulator added.

The NBU believes that after several policy rate increases, which began in October, 2017, the current monetary conditions "are sufficiently tight to bring inflation back to its mid-term target", as projected in the regulator's January inflation report.

"However, if fundamental inflation risks increase further, the NBU may resort to further key rate hikes," the central bank added. "The next key rate decision, which will be taken in April, will factor in new macroeconomic projections, inflation projections in particular".

In January, headline inflation accelerated to 14.1% year-on-year. At the same time, according to preliminary estimates of the NBU, inflation rate "remained high in February". "This was primarily due to the faster-than-expected growth in prices for food products and services. Faster growth in fuel prices due to a substantial increase in global oil prices and hryvnia depreciation in the past months contributed as well," the statement reads.

In January, core inflation accelerated to 9.8% y/y. This was driven by a number of factors: higher production costs amid further rapid wage growth, hryvnia depreciation over several previous months, and accelerated consumer demand, the NBU underlined.

The NBU believes that its January's forecast that inflation will retreat to 8.9% in 2018 and will return to the target in mid-2019 remains relevant. At the same time, the inflation risks the NBU considered when making its policy decision in January still persist, specifically, high vulnerability of the Ukrainian economy in the absence of clear signs that the International Moneary Fund (IMF) will resume providing official financing; high inflation expectations of economic agents; the rapid growth in consumer demand.