Faced with collapsing economic growth, but only mild inflationary pressures, Ukraine’s National Bank of Ukraine (NBU) slashed the key policy rate from 10% to 8%, the NBU said in a statement on April 23.

"Together with other measures taken by the NBU, such as expanding its set of liquidity support tools and the introduction of preferential terms for borrowers by banks, this will provide the economy with the impetus required to provide support for households and businesses in these difficult times, and to ensure that business activity picks up quickly once the quarantine is lifted," the NBU said in a statement as cited by Interfax Ukraine.

The central bank says it expected to continue its easing over the rest of the year and will cut rates to  7% by year end.

"In deciding how quickly the key policy rate can be decreased to that level, the NBU will take into account how talks with the IMF progress, how the coronavirus pandemic develops, how quickly quarantine measures are lifted, and what anti-crisis measures other governments and central banks adopt," the central bank said.

The NBU leaves open the possibility of a greater easing in monetary policy. The bank says it wants to wait and see how the interplay between upward inflationary pressure from the devaluation of the hryvnia plays out against the disinflationary pressure from falling consumer demand that is a result of the coronavirus epidemic lockdowns.

The central bank has been winning its war against inflation and brought the rates down from the double digits that plagued most years after the 2014 Euromaidan demonstrations led to a change of government but sparked a major economic crisis.

Currently inflation is 2.3% and the NBU has been slashing rates aggressively in a series of full percentage point cuts. At the most recent meeting in March the NBU cut by another full percentage point to bring the rate to 10%.

At the same time, the economic outlook for the economy has considerably worsened on the back of the coronavirus (COVID-19) pandemic that is sweeping the world. Growth of just over 3% this year has been turned into a prediction of -4.8% this year.

Coronavirus restrictions are expected to push Ukraine’s economy into a recession, the first since 2014-2015, when Russia’s military attacks threw Ukraine’s economy off balance. Ukraine’s Cabinet of Ministers released its new economic forecast for this year last week: a 4.8% drop in GDP and a loss 250,000 jobs. A total of up to 2mn Ukrainians may end up on the dole this year.

Inflation will be driven up too by the devaluation of the currency to hit 11.6% - double the pre-coronavirus forecast. However, central banks around the world are slashing rates despite the increases in inflation, as inflationary pressure will be mitigated by crisis-related falling demand and consumption, and the focus has switched from good monetary policy to simply bump-starting economic growth, which has stalled during the global lockdown.

Facing Ukraine’s first GDP drop in five years, the central bank is expected to cut its prime rate, according to a Reuters poll. Eight of 16 analysts expect a rate cut to 9%, from 10%. Three see a cut to 9.5%. Five see no change. Strengthening the argument for cutting the rate, inflation is now only 2.3%, brought down by low energy prices and faltering consumer demand.

The NBU also revised downwards its inflation forecast for Ukraine in 2020 from 4.8% to 6% and confirmed it at 5% for 2021-2022.

"In 2020, inflation will remain within the target range of 5% +/- 1 pp. This will not be impeded by monetary and fiscal support to the economy," the NBU said.

Inflation will also be contained by declining global energy prices, which will continue to influence domestic fuel prices. At the same time, the increase in inflation compared with the current level will be primarily driven by a pass through from the recent depreciation of the hryvnia, the NBU said.

"In Q1 2021, inflation will temporarily deviate from the target range against a low comparison base. Afterwards, it will decrease and stabilise at the medium-term target of 5%. This level will be achieved thanks to the NBU's prudent monetary policy and a more restrained fiscal policy after the pandemic ends and economic activity recovers," the central bank said.

The NBU also revised downwards its GDP growth forecast for 2020 from 3.5% growth to 5% decline, while improving the expectations for its growth in 2021 from 4% to 4.3%.

"The adverse impact of the pandemic on the Ukrainian economy is expected to be relatively short-term, but strong. The quarantine has already affected business activity, consumption and employment. A decrease in global demand has also limited export opportunities for Ukraine," the central bank said.

According to NBU estimates, the effect of these factors will be the most pronounced in the second quarter of this year.

"A gradual lifting of quarantine restrictions will allow the economy to recover in H2 2020. Loose fiscal and monetary policies will contribute to the economic recovery. An increase in budgetary spending by the government to overcome the crisis, along with the NBU's actions to support the banking system, will mitigate the negative impact the pandemic has on the economy," the NBU said.

The economy of Ukraine will resume growth at round 4% in the following years, the regulator said.