Ukraine's central bank cuts key interest rate to 18%

By bne IntelliNews May 26, 2016

The National Bank of Ukraine (NBU) will cut the refinancing rate from 19% to 18% from May 27, the regulator said in a statement published on May 26.

The move was attributed to "a steady disinflation trend" in the country. Specifically, inflation in April stood at 3.5% m/m, which is reflected the elimination of preferential natural gas tariffs for households. .

In April, inflation stood at 9.8% y/y, slowing to single-digits for the first time in two years. Sluggish economic growth, which will continue to weigh on consumer demand, is one of the key factors that will keep inflation firmly on a downward trend in 2016, Ukrainian authorities believe. Low global prices for energy and food are among other factors supporting the downward trend in inflation.

The disinflation trend was underpinned by subdued domestic consumer demand, tight monetary policy, and appreciation of the hryvnia exchange rate observed in recent months, the NBU's statement said.

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

According to the NBU, the upward pressure on headline inflation from domestic demand-side factors is expected to be "insignificant over the forecast horizon". Instead, economic recovery will be driven by investments and supported by external demand.  

Tthe continuation of cooperation with the International Monetary Fund (IMF) under a $17.5bn support programme agreed in March 2015 is "critical for achieving price stability", the regulator stressed.

"The government's resolve to move urgent reforms forward and the support of parliament is essential to keeping the program on track," the statement added.

On May 18, an IMF mission reached a "staff level agreement" with the Ukrainian authorities on policies needed to complete the second review under the Extended Fund Facility (EFF), subject to approval by the IMF's management and executive board in late July.

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