Ukraine's central bank cuts key interest rate to 15.5%

By bne IntelliNews July 28, 2016

The National Bank of Ukraine (NBU) will cut the refinancing rate from 16.5% to 15.5% from July 29, the regulator said on July 28.

According to an NBU statement, further alleviation of risks to price stability enabled the central bank to ease monetary policy, which is consistent with the need to achieve its inflation objectives set at 12% +/-3% for 2016 and 8% +/-2% for 2017.

Deflation in Ukraine in June stood at 0.2% m/m (+6.9% y/y) following 0.1% /m/m inflation in May. The strengthening hryvnia and a seasonal decrease in food prices (vegetable prices fell 9.2% m/m) stood behind June's improvement.

"Low aggregate demand, a gradual appreciation of the hryvnia exchange rate and a high supply of food products have contributed to the slowdown in inflation," the NBU's statement reads. "Real wages resumed growth in annual terms. However, as before, consumer demand did not exert additional pressure on inflation."

The central bank added that the external economic conditions remain "broadly favourable", while the net foreign exchange supply was recorded in the domestic market. "Under such circumstances, the NBU continued to purchase foreign currency to replenish its international reserves, while not hampering a gradual appreciation of the exchange rate," the statement said.

The regulator has also kept its annual real GDP growth forecast unchanged at 1.1% y/y in 2016 and 3.0% y/y in 2017.

Ukraine's real GDP increased by 0.1% y/y in the first quarter of 2016 (declined by 0.7% q/q). At the same time, experts believe growth prospects remain challenging in light of weak exports, ongoing security risks, the weak domestic business environment, and the need for fiscal prudence.

The Ukrainian government forecasts economic growth at 2% in 2016. Meanwhile, the International Monetary Fund (IMF) puts Ukraine's economic growth at 1.5% in 2016, and at 2.5% in 2017.

At the same time, the NBU has revised the current account deficit forecast downwards from $2.3bn to $1.8bn. "The downward revision reflected lower natural gas imports, improvements in the terms of trade, projected high yield of crops and larger private remittances from abroad," the statement added.

The country's goods trade deficit stood at $694mn in January-May following a $881mn deficit at the end of April. Kyiv-based experts believe that delayed energy imports remain the key reason for the improved trade balance. The state statistics service Ukrstat reported earlier a surplus of $134.4mn for January-May 2015.

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