Ukraine's central bank cuts key interest rate to 14%

By bne IntelliNews October 27, 2016

The National Bank of Ukraine (NBU) will cut the refinancing rate from 15% to 14% from October 28, the regulator said in a statement published on October 27.

The move was attributed by regulator to "the further alleviation of risks to price stability" in Ukraine, which provides some room  to ease monetary policy, which was consistent with  the need to achieve its inflation targets in 2017-2018.

According to official data, Ukraine’s inflation stood at 1.8% m/m in September, and 7.9% y/y, which was fully in line with the NBU’s forecast. The acceleration of headline inflation was mainly attributed to upward adjustments in administered prices. The NBU puruses its inflation target of 12% +/-3% for 2016 and 8% +/-2% for 2017.

The central bank underlined that in October, FX supply exceeded demand in the FX market, enabling the NBU to purchase foreign currency to replenish international reserves without counteracting the appreciation trend.

In the fourth quarter of 2016, inflation is expected to return to the target due to the reflection of upward adjustments in statistics for utility tariffs, the NBU added. In the absence of significant unforeseen events, the NBU is on course to meet the end-year inflation target for 2016 (12% +/-3%).

“Annual inflation is expected to follow an erratic path throughout 2017. In the first and second quarters of 2017, inflation might exceed 12%, reflecting a statistical base effect and a high contribution from administered prices,” the central bank said. "As these effects wane, annual inflation is expected to return to the target in the fourth quarter of 2016. At the same time, core inflation is expected to remain stable at 5-6%.”

The central bank has kept its 2016 economic growth forecast unchanged at 1.1% y/y. In the medium-term, GDP is expected to grow at a more moderate pace than expected earlier: 2.5% y/y in 2017 and 3.5% y/y in 2018.

“The weaker GDP growth forecast  reflects the revision of assumptions related to a worsened external environment for Ukrainian exporters," the NBU added.

At the same time, the bank revised upward the current account deficit forecast to $2.5bn in 2016, $2.9bn in 2017 and $2.8bn in 2018. 

In 2017-2018, the overall balance of payments is expected to be in surplus supported by the financial account net inflows, including FDI inflows, the NBU said, pointing out that these inflows, combined with expected disbursements of the next loan tranches from the International Monetary Fund (IMF), will increase international reserves up to $17.5bn by the end of 2016, to $23.1bn by the end of 2017, and $27.8bn by the end of 2018.

According to official data, Ukraine’s gross international reserves rose 9.9% in September, or by $1.4bn, to $15.5bn.

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