Ukraine Watch: Key rate kept unchanged at 7.5%, inflation spike seen temporary

At the latest monetary policy meeting, yesterday, the National Bank of Ukraine (NBU) decided to keep the key rate at 7.5%. As the National Bank of Ukraine states, despite having inflation at 9.5% and core CPI at 6.9%, the current balance of economic risks does not push the Board of Governors' decision into further rate hiking. Inflationary forces behind recent CPI numbers are temporary due to volatile commodity prices related to agricultural goods and natural gas. Inflation expectations of households and analyst have been anchoring.

The NBU emphasized that fundamental inflationary pressure (probably meaning inflation linked to the business activity) is not observed, and inflation will start to wind off starting from Q3 2021, reaching the targeted corridor 5%+/-1pp in the H1 2022. Nevertheless, the central bank communicates that they ready to increase the key rate if necessary.

The NBU states that volatility on global markets, deterioration terms of trade and escalation of a military confrontation among risks of the current monetary stance as the key risk remains to be a large outbreak of COVID-19 pandemic.

Chart 2 - Inflation expectations in next 12-months (%)

NBU, RBI/Raiffeisen Research

Moreover, the regulator will begin to remove anti-crisis monetary instruments like long-term refinancing for banks and interest rate swap auction. Those instruments were adapted to the banking system in Ukraine during the crisis, and restoration of economic activity will lessen the relevance of anti-crisis measures.

There was nothing unexpected from the national bank as this monetary policy committee meeting supported the previous MPC meeting in March. No changes in economic forecasts or banking regulation have been introduced. However, the next meeting on 22 July might have more decisive actions and an updated macroeconomic forecast.