Page 50 - UKRRptOct19

consumer demand, coupled with intense wage growth, will fuel rising prices.
The NBU found that domestic political risks, which might affect inflation, have lowered with ​the new session of parliament​ and ​Cabinet appointments​. These developments create a new opportunity for activating Ukraine’s talks with IMF. At the same time, risks persist related to lawsuits that contend against state decisions on recovering the banking sector.
The regulator’s board might deepen cuts in the key policy rate in case it sees the intensification of structural reforms. However, the consistent inflation slowdown is equally important. Should inflationary risks (in particular, high pressure of consumer demand) become realized, the monetary softening will be more moderate.
A reduction of political risks due to the formation of a new government, a stronger hryvnia (which has been buoyed by inflows of foreign investments in the local government bond market) and lower energy prices continue to keep price growth moderate. Meanwhile, a strong expansion of consumption in 2Q19 (GDP rose by 4.6% y/y in 2Q19, up from 2.5% growth y/y in 1Q19) could drive price growth higher.
Taking into account that the real key policy rate still remains high (we estimate it at 8.5%), the NBU appears to still have some room for more cuts this year. However, analysts think that the ongoing uncertainty in global markets (especially in commodities) and the fact that inflation is running above the target of 5% and NBU's forecast for this year of 6.3% y/y in December will likely limit the potential for further rate cuts this year to 50-100 bps.
50​ UKRAINE Country Report​ October 2019 ​ ​www.intellinews.com