National Bank of Ukraine Decides Policy Now Sufficiently Tight

April 12, 2018

From last October to the start of March, Ukraine’s policy interest rate was increased 450 basis points to 17.0% in just four incremental moves. That tightening abruptly reversed a prolonged easing stance, the last element of which was a 50-bp cut last May. The reason for this reversal was a rise of inflation to well above the medium-term target of 4-6%. Led by food costs, total and core CPI inflation were at 13.2% and 9.4%, respectively, as of March. Officials believe that inflation will be receding, according to a statement released today, to 8.9% by the end of 2018, 5.8% by end-2019 and 5.0% by end-2020. Tighter monetary policy has already lifted the hryvnia, which will curb imported inflation.

The wild card is intensifying geopolitical risk.

Global risks of large-scale trade wars have risen significantly, which could cause dramatic fluctuations in global commodity prices, restrict access to external markets for Ukrainian exporters, and consequently, decrease foreign exchange earnings. A reversal in the favorable trends that have persisted in the global economy since early 2016 could have negative implications for the Ukrainian economy, which remains vulnerable to changes in external conditions.

Because of the above dangers and other risk factors, for example if a scenario in which fiscal policy is loosened, the statement goes on to reserve the right to hike the central bank policy rate still higher in the future “if underlying inflation risks increase further” so as “to bring inflation back to its mid-term target.”

Copyright 2018, Larry Greenberg. All rights reserved. No secondary distribution without express permission.



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