Ukraine's central bank cuts key interest rate to 16.5%

By bne IntelliNews June 23, 2016

The National Bank of Ukraine (NBU) will cut the refinancing rate from 18% to 16.5% from June 24, the regulator said on June 23.

The move was attributed to steady inflationary pressure reduction, improved inflation expectations and stable foreign exchange market situation. Specifically, headline inflation dropped to 7.5% y/y in May, which was consistent with the NBU's projections.

"Inflationary pressure reduction was of a fundamental nature, which is confirmed by core inflation slowdown, an regulator said in a statement. "That was favoured by prudent monetary policy and strengthening of hryvnia exchange rate due to favorable world commodity markets situation. In addition, increase of foods supply [during summer months] supported the disinflationary trend."

The NBU intends to archive 12% +/-3% inflation this year, 8% +/-2% in 2017.

According to NBU estimates, economic growth was accelerated in the second quarter of 2016 due to external and investment demand. "That was favoured by improved global commodities markets situation and better enterprise expectations against the background of internal political stabilisation and agreement with the International Monetary Fund at expert level regarding second review of Extended Fund Facility Arrangement (EFF)," the statement added.

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 IMF puts Ukraine's economic growth at 1.5% in 2016, and at 2.5% in 2017.

Ukraine is still negotiating the renewal of its overall $17.5bn credit agreed with the IMF in March 2015 to aid its economic recovery. In May, the Fund said the government must still secure the passage of 19 bills through parliament to assure the resumption of money under the programme.

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