Ukraine central bank hikes policy rate 1.5pp, worsens CPI outlook

The National Bank of Ukraine (NBU) announced on Jan. 25 that it hiked its key policy rate to 16.0% from 14.5% starting Jan. 26. In a statement on its website, the regulator stated that tight monetary policy will help to curb inflation and reach the NBU inflation target by the middle of 2019. In 2017, inflation sped up to 13.7% (from 12.4% in 2016), going far beyond the NBU inflation target range of 6-10%.



Monetary policy helped little in offsetting the factors that caused inflation in 2017, the NBU admitted. Reduced food supply, increased cost of production, and boosted consumer demand were factors in spiraling consumer inflation. Besides that, soft fiscal policy also played a role through sharp hikes in pension payments and budget expenditures.



The NBU also revised its 2018 CPI projection to 8.9% yoy growth from 7.3% that it had estimated in October. It expects 5.8% yoy growth in CPI in 2019 and 5.0% in 2020. Real GDP is projected to grow 3.4% in 2018 before slowing to 2.9% annually in 2019-2020 on tight monetary policy and fiscal constraints, coupled with slow progress in structural reforms.



Evgeniya Akhtyrko: We warned about the high risk of a further hike in the key policy rate at the start of 2018. However, the decision to raise the rate that much before seeing January’s consumer inflation results came as a surprise.



Apparently, NBU policy makers decided to act proactively, anticipating that the 1Q18 inflation results are likely to surpass December’s indicator of 13.7% yoy growth given the massive fiscal spending at the end of 2017 and a recent devaluation spike of local curency.



The National Bank also remains attached to the idea that tight monetary policy might be effective in combatting unleashed inflation in Ukraine. This might be an illusion as the key inflation factors in 2018 will be the same as in 2017, when monetary measures hardly yielded any results.



Our projection for CPI growth at 8.9% YTD for the current year now coincides with the NBU’s updated forecast. Deceleration is likely to occur only in the second half of the year.

Источник: Конкорд Капитал