The National Bank of Ukraine (NBU) has kept its key policy rate at 18% following its increase by 0.5 percentage points (pp), from September 7, the regulator said in a statement on December 13.

"The current and forecast monetary conditions are sufficiently tight to bring inflation to its medium-term target of 5% in 2020," the statement reads.

Annual consumer price inflation in Ukraine stood at 10% in November. The acceleration of inflation as compared to previous months was anticipated and driven by the underlying inflationary pressure remained high. At the top of that, administered prices were a major inflation factor, as natural gas prices for households grew in November.

However, inflation is expected to decline and reach the 5.0% target at the end of 2020, as projected in the NBU’s October Inflation Report.

However, tight monetary conditions will be the main factor behind the deceleration of inflation, the regulator believes. "In particular, interest rates on hryvnia household deposits continue to grow, as expected, in response to the previous key policy rate hikes," the NBU underlined. "This makes saving more attractive and restrains consumer demand."

At the same time, pro-inflation risks have weakened since the previous decision due to a number of new favourable factors, both internal and external, the regulator added.

These factors include the record harvest of corn and sunflower, which will make these crops and related products cheaper (sunflower oil, feed, etc.); a drop in global energy prices that will gradually pass through to domestic prices; arrangements reached between the US and China to stop raising tariffs, which reduces the risk of global trade wars; expectations of a less aggressive interest rate hike by the US Federal Reserve System next year; and favourable FX market conditions.

These factors, together with a tight fiscal policy, increased the net supply of foreign currency on the interbank market, and a strengthening in the hryvnia exchange rate in November and December, the NBBU underlined.

The surfeit of foreign currency on the FX market enabled the NBU to further increase international reserves - since the beginning of the fourth quarter of 2018, the central bank has purchased over $700mn net.

The NBU also considers as "important" the significant progress achieved in continuing cooperation with the International Monetary Fund (IMF) under a new Stand-By Arrangement, as well as receiving related financing from other official lenders. This was "a key assumption" of the NBU’s macroeconomic forecast, the central bank added.

In November, Ukraine secured an agreement between Kyiv and its main donor, the International Monetary Fund (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 so far under the multinational lender's EFF.

However, there are "significant risks" which, when materialised, could delay the NBU’s meeting its inflation target, specifically, robust consumer demand, fuelled, among other things, by higher wages, putting further pressure on prices; a worsening of expectations, due to a new political cycle.

Among other risks - geopolitical tensions, such as an escalation of the Azov Sea conflict, which could cut export earnings; the expected slowdown in the global economy, including in the economies of Ukraine’s main trading partners.