Ukraine Watch: April inflation slightly lower, key rate likely hiked again
CPI growth slowed down a bit in April, reaching 0.7% mom. The yearly inflation rate at 8.4% yoy remains above the target corridor without signs of coming back. It is unlikely that the data for May will be a negative surprise, forcing the NBU to raise its key rate again in June.
| Inflation and Key rate dynamics, % |
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| NBU, RBI/Raiffeisen Research |
Inflation continues to roar in Ukraine, challenging the monetary policy of the National Bank of Ukraine
Inflation dynamics in Ukraine in April showed a slightly lesser momentum compared to March 2021 increasing by 0.7% mom or 8.4% yoy. Core inflation in April 2021 compared to March 2021 added 0.7%, too. In yearly comparison, core CPI rose marginally from 5.9% in the previous month to 6.3% yoy. The difference between inflation and core inflation was thus reduced to 2.1 pp.
Food prices remain a key driver for the CPI in April. Prices for food and soft drinks increased by 1.2%. Sunflower oil continues its upward trend from the beginning of the year, increasing by 10% mom. Sugar added 5% mom. It shouldn’t be a surprise since prices for agricultural commodities hitting new highs over the world. Other food products changed just marginally. Prices for alcoholic beverages and tobacco products increased by 0.9% due to a rise in tobacco excise by 1.5%. Prices for housing, water, electricity, gas increased by 0.4% mom.
The main reason is an increase in natural gas prices by 2.3% mom. Overall, in yearly measurement, the change on gas prices was much bigger reaching 26.5% yoy. Yet, in 2021 price dynamics on gas remained highly administrated by the government, potentially leading to an even more considerable deferred increase of gas prices this year.
Despite a severe third wave of COVID19 in Ukraine, prices on medical services increased slightly by 0.9% mom or 6.2% yoy. Prices for transport increased by 0.6% mom. Such an increase was dictated by higher fares passenger transportation via rail 2.6% and road 1.4%.
In general, this development of inflation is in line with our forecast, which expects it to float around the 8.5% level in the coming months. The statistical downward impact on the current inflation rate has been a result of quarantine restrictions. Therefore, the data for May will show whether the rapid price increase has ceased or whether April was a brief respite. However, it is unlikely that the data for May will be a negative surprise, forcing the NBU to raise its key rate again in June.
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Oleh KLIMOV
Ukraine Oleh Klimov is working in Raiffeisen Bank Aval from beggining 2020. His expertise mainly lies on capital markets that helps him to analyze and cover regional bonds and interest rates markets in Ukraine. Also, he helps other local analysts on monetary policy, inflation, commodities market and balance of payments of Ukraine. From 2018 he was working as a quantitative researcher on FX and rates markets in the Kyiv School of Economics. His other experience includes being trader on macro desk in Geneva-based MKS Switzerland and Head of Trading for IGR in Dubai providing service for institutional clients on Asian and European rates and commodities markets . He has BSc in telecommunications engineering and MA in economics from the Kyiv School of Economics.
A third pandemic wave and a slow vaccination weigh on Q1 growth. Still, Ukraine's economy is seen to grow almost 4% in 2021. Inflation skyrocketed to almost double digits, which may trigger additional rate hikes. Lack of IMF progress and geopolitics pose challenges 2021. |
An increasingly hawkish National Bank of Ukraine raised the key rate by 100bp to 7.5%, showing its determination to anchor inflation expectations, while March inflation reached 8.5%. More hikes cannot be excluded, depending on the inflation trajectory in coming months. |