The CPI increased by 1.7 mom in March, which was the highest monthly increase since 2018. Thus,inflation reached 8.5% per annum. In March 2021, the CPI increased by 1.7% comparing to February 2021, reaching 8.5% in annual terms. The core CPI rose by only 1.6% m/m, or by +5.9% from March 2020. Despite the astounding figures, such inflationary dynamics were more likely due to seasonal factors. Moreover, there was an economic shock from the raise of the minimum wage in January, but it was less dominant than the seasonal one. On the other hand, government regulation of natural gas and electricity prices dampened major pro-inflationary processes.
The largest price growth in annual terms was observed for food and energy, which was due to theeffect of a low comparative base, global market trends and an increase in consumer spending. Food and beverage prices rose by 2.1% mom to 10.4% yoy due to depletion of the current supply of raw foods, such as fruits and vegetables. Another reason for the rise in prices for raw foods was the strong demand from exporters. For example, the sunflower oil price rose the most (by 9.7% m/m). Prices for alcoholic beverages and tobacco products continued to drift into the positive territory, having increased by 0.7% m/m as a result of increasing excise tax, which increased the prices for tobacco products by 1.2% m/m.
|Chart 3 - Inflation and Key rate dynamics, %|
|NBU, RBI/Raiffeisen Research|
The current trend of accelerated price growth contributed tothe revision of our previous forecast towards a slight worsening of inflation indicators. We expect some pro-inflationary trends to be temporary. On the other hand, low vaccination rates in Ukraine and its major trading partner countries do not indicate possible deflationary pressures, as high commodity prices and prior fiscal measures dominate the current CPI dynamics. Considering current trends, we changed our inflation forecast, expecting that after it reaches the maximum by the end of the third quarter, the annual inflation trend will reverse and by the end of the year, the CPI will be 8.6%, while the average annual inflation rate is estimated at 8.7%.
The National Bank of Ukraine raised the key rate by additional 100bp to 7.5% (overall 150bp this year so far), demonstrating determination to contain further growth in inflation expectations, while inflation reached 8.5% in March. Contrary to expectations of many analysts, the National Bank of Ukraine raised its key rate from 6.5% to 7.5% (we forecasted 7%), responding quite toughly and ambiguously to the accelerating inflation, which in March amounted to 8.5% yoy, exceeding the upper limit of the target corridor (5% ± 1 pp) already by 2.5 pp. The NBU also expects the key rate to be higher than the future long-term trend only for some time, in order to prevent the further worsening of inflation expectations.
In our opinion, the desire to "anchor" inflationary expectations was the main motive behind the NBU’s decision. The NBU demonstrates, by its previous statements and the current decision, determination to make every effort to curb pro-inflationary processes, since painful episodes of high inflation are still fresh in the minds of market participants and Ukrainian residents.
We do not exclude further hikes in the key rate in response to the CPI’s possible deviation from the forecast trajectory in the coming months. The NBU's policy somewhat echoes its decision of last year’s June, when, unexpectedly for many analysts, it lowered the key rate by 200 basis points at once, from 8% to 6%. After that decision, the discount rate remained unchanged until the meeting in March 2021. According to the updated baseline trajectory of the NBU forecast for the key interest rate, it should remain at around 7.5% until the meeting in April 2022. After that, the discount rate will return to 7% by the end of 2022, which is in line with the baseline trajectory of the previous forecast. We generally agree with the NBU’s point of view on this. Nevertheless, we believe that, given the government's propensity for populist decisions and high geopolitical risks, the likelihood of the discount rate being revised upward again remains quite high.
|Chart 4 - Inflation and Key rate forecast|
|Ukrstat, RBI/Raiffeisen Research|