The Board of the National Bank of Ukraine has decided to raise the key policy rate to 6,5% per annum. The decision is aimed at gradually reducing inflation to its target, as the Ukrainian and global economies are recovering.
Inflation accelerated in early 2021 and, as expected, deviated from the 5% ± 1 pp target range.
Consumer inflation increased to 6.1% yoy in January. Inflation continued to accelerate in February according to the NBU’s preliminary estimates. Consumer inflation reading, which was calculated using online monitoring data, exceeded the NBU’s forecast, while inflation expectations remained elevated. At the same time, the underlying inflationary pressure, as seen in core inflation, was generally in line with the regulator’s forecast trajectory in January–February.
Food and fuel prices contributed most to the rise in inflation in the first months of 2021. This is explained by poorer harvests and a rapid growth in global commodity prices, fueled by the fast pace of the revival in the global economy. Inflationary pressures from trading partner countries continued to increase. Domestic consumer demand remains robust. Moreover, the price trend continues to be influenced by the effects of last year’s hryvnia depreciation.
Inflation will reach its peak in mid-2021, but will decelerate afterwards, returning to its target range in H1 2022.
The global and Ukrainian economies, which are recovering rather quickly, will produce significant inflationary pressures throughout the whole of 2021. However, the inflation trend will be reversed gradually as new harvest supplies come to the market, the effect of a low comparison base wanes for some products, and the NBU raises its key policy rate. Inflation will thus decelerate at the end of the year and will settle within the 5% ± 1 pp target range in H1 2022.
The primary assumption of the NBU Board is that Ukraine will continue to cooperate with the IMF.
The NBU expects further progress to be made in negotiations between Ukraine and the IMF. Cooperation with the IMF and other international partners is essential for financing budget requirements and providing the economy with an additional impetus for growth. This will also enable Ukraine to maintain its international reserves at about USD 30 billion.
As before, the imposition of stricter quarantine restrictions in Ukraine and globally to fight the COVID-19 pandemic remains the key risk to macrofinancial stability.
Vaccination campaigns are already proving to be effective in some countries. However, they are being rolled out rather slowly, as a result of which the risk of tighter quarantine measures this year remains significant. In particular, some regions of Ukraine have seen a significant rise in morbidity in recent months. The pandemic still poses the threat of a decline in business activity and a cooling of consumer and investment demand. This, in turn, could rein in inflation.
Conversely, the rapid recovery of business activity, rebounding commodity markets, the lagged effect of large-scale expansionary measures, and potential pent-up demand are generating risks of higher inflation globally. Under such conditions, among other things, inflationary pressures from Ukraine’s main trading partners could increase further.
There are other significant risks. They include:
- volatile global capital markets
- a more dramatic deterioration in the terms of trade
- an escalation of the military conflict in eastern Ukraine or on the country’s borders.
Given the above balance of risks and the significant rise in fundamental inflationary pressures seen in recent months, the NBU Board decided to raise the key policy rate, to 6,5%.
The NBU stands ready to raise its key policy rate more resolutely in order to curb fundamental inflationary pressures, stabilize expectations, and bring inflation back to its target.
The decision to increase the key policy rate, to 6,5%, was approved by an NBU Board Decision on the key policy rate No.84, dated 4 March 2021.
A summary of the discussion by Monetary Policy Committee members that preceded the approval of this decision will be published on 15 March 2021.
The next meeting of the NBU Board on monetary policy issues will be held on 15 April 2021, according to the confirmed and published schedule.