The National Bank of Ukraine (NBU) kept unchanged its consumer inflation forecast of 6.3% for the full year in 2019 and 5% for 2020, according to its quarterly inflationary report published on February 7.
After an increase to 10% in the last months of 2018 to 10%, inflation is already in retreat in the first month of the year, falling to 9.2% in January thanks to the tough stance taken by the NBU that hiked rates at the end of 2018.
The NBU predicts that consumer inflation will continue to drop this year, reaching 6% - the upper end of the target inflation range - in the beginning of 2020, according to the document.
Rising utility prices and wages will be the major inflationary factors, as they will increase production costs and foster consumer demand. However, the influence of these factors will be diminishing, the central bank believes.
At the same time, the NBU’s tight monetary policy, coupled with the government’s prudential fiscal policy, will counteract consumer inflation. Lower exchange rate volatility, and moderate price growth for imported goods, will also curb inflation.
The NBU also kept unchanged its forecast of real GDP growth. In 2019, Ukraine’s economy will slow to 2.5% year-on-year growth. In 2020, it will accelerate to 2.9% y/y growth and 3.7% y/y in 2021 as a result of transition to softer monetary policy and the revival of investment activity amid lowered political uncertainty.
"A bit better-than-expected 2018 consumer inflation result empowered the NBU with more confidence in its vision on inflation trends," Evgeniya Akhtyrko at Kyiv-based brokerage Concorde Capital wrote in a note on February 8.
Meanwhile, the major assumption of the NBU’s forecast is continuing Ukraine's cooperation with the International Monetary Fund (IMF). In 2018, Kyiv has secured an agreement with the IMF over a new 14-month stand-by programme of $3.9bn. The programme will replace the arrangement under the Extended Fund Facility (EFF) agreed March 2015. Ukraine has received $8.4bn from the IMF under the multinational lender's EFF.