Ukraine Watch: Key Rate hiked, inflation stabilizing

The NBU raised the key rate by 50 bp to 8.5%, in line with market expectations. Annual inflation in August was again 10.2%, monthly prices fell by 0.2%. Inflation corresponds to the NBU forecast, so the probability of key rate kept unchanged until the end of 2021 is high.

Chart 1 - Inflation and Key rate dynamics, %
NBU, RBI/Raiffeisen Research

The central bank raised interest rates and announced a rollback of anti-crisis monetary solutions from October

The NBU's decision to raise the discount rate was predicted by most analysts and was in line with the baseline forecast trajectory presented at the end of July. The inflation trend in July-August was in line with expectations and so far slightly above the 10th level. At the same time, core inflation even fell slightly from 7.3% to 7.2% y/y.

Chart 2 - Monetary base, M3 and inflation
NBU, Ukrstat, RBI/Raiffeisen Research

At the same time, the risks of further price increases remain very significant, which keeps the possibility of a key rate hike on the agenda, but not in our base scenario. Food and energy prices on global markets, although slightly adjusted, remain very high. Additional nervousness is created by the continuing rise in natural gas prices in Europe.

The NBU continues to phase out its anti-crisis measures by announcing the end of long-term refinancing from October and reducing short-term refinancing loans from 90 to 30 days. The money supply growth rate remains relatively high. However, although it has declined in recent months due to the high base effect and the gradual winding down of anti-crisis liquidity support measures.

Inflation stayed again at the level of the previous month

The monthly inflation trend in August is entirely in line with the 2001-2019 average except for three years of high inflation (2008, 2014-2015). August is likely to be the only month in 2021 when prices have fallen. The main reasons for that were 1) seasonal decline in prices of vegetables (-18.3% m/m) and fruit (-5.0% m/m); and 2) appreciation of UAH, which lowered prices of clothes and shoes by 3% m/m.

Chart 3 - Monthly CPI index, % mom
SSSU, RBI/Raiffeisen Research

There is a chance that inflation in September will be even marginally below the regulator's forecast (11.2% yoy). For September to meet this target, monthly inflation would have to be 1.4%, slightly above the 2001-2020 average of 1.1%mom. Thus, the likelihood that the September data will again come as a negative surprise to the NBU and cause a further rate hike is low.