Ukraine Watch: Inflation accelerated again, likelihood of rate hike increases

After a slight respite in April, CPI inflation rose strongly again in May, from 8.4% to 9.5% yoy. Mixed-effects from demand and supply sides pushed inflation to a two-year-high and leave the Cental Bank with a tricky decision at the upcoming monetary policy meeting next Thursday.

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

Inflation in May 2021 compared to April 2021 had grown up by 1.3% mom, which amounts to 9.5% yoy. Core inflation in May 2021 compared to the previous month increased by 0.7% mom.

In May, food and non-alcoholic beverages prices increased by 1.7% mom, which amounts to a significant 9.9% yoy increase. Sunflower oil continues to be most inflation reactive, with the most increase by 6.8% within a month. Prices for other food products increased only marginally. In April, the Cabinet of Ministers ended the direct price setting on energy products and returned to market normality. Thus, prices on natural gas jumped by 14.6% in May. Such an increase adds inflationary pressure from housing utilities that increase by 3.9% mom, or a 35.5% increase from May 2020. Prices for transport increased by 0.7% primarily due to higher fares in rail and road passenger transport by 3.0% and 1.7%. Prices on medical services moderately increased by 6.4% y/y. Prices on cloth decreased by 3.8% y/y, remaining the only deflationary process.

Yet, prices on oil and gas, a poor harvest of crops, along increased labour costs make current inflation hard to deal with for the National Bank of Ukraine (NBU). Despite partially being only temporary phenomena, high CPI hurts the disposable income of households, in turn underpinning the economic recovery. However, rate hikes by the central bank may reduce investment demand from the private sector even further.

Contributions to headline inflation (pp)
Ukrstat, RBI/Raiffeisen Research

Overall, the acceleration of inflation in May was inspired by three reasons, which are temporary and not under the control of NBU's decisions:

  1. Higher fruit prices (+14.5% mom) due to unfavourable weather conditions;
  2. Rejection of fixed gas prices which resulted in a 14.6% increase in gas prices
  3. Continuing growth of sunflower oil prices due to poor harvest (+6.8% mom).

On the one hand, inflation accelerated in May, while on the other hand, its main drivers do not depend on Key rate decisions and are temporary. Given the revaluation of the hryvnia and seasonal cheapening of fruits and vegetables, monthly inflation in June may be close to zero. As a result, CPI (yoy) may be close to the last NBU forecast (9.2%). Moreover, while the high inflation data release increased the likelihood of an rate hike next week, the NBU may still postpone the rate hike until the July meeting.

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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.

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