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conference on February 12.
Smolii expects inflation to ease to 6.3% in 2019. Inflation was 9.2% year-on-year in January, down from 9.8% in December and is expected to continue to fall this year to 5-5.5%. The central bank kept its key rate unchanged in January to help bring inflation down.
The minutes of the meeting revealed that eight committee members called for keeping the key rate unchanged at 18.0%, while only one member called for lowering it by 0.5pp to 17.5%.
The monetary committee members noted that keeping the key policy rate at 18.0% addresses the need to control inflation and reach the mid-term inflation target of 5% y/y in 2020. The NBU still sees risks that could prevent inflation from cooling to levels assumed by the central bank’s forecast. In particular, the central bank cited uncertainty related to the election process, which might result in worsening inflationary pressures.
In addition, the majority of the committee noted that the current tight monetary policy should be able to counteract fundamental inflationary pressures. The decline of core inflation is slow amid high consumer demand fuelled by fast-growing wages. The worsening terms of trade, geopolitical risks, and uncertainty in the gas transit sphere in 2020 were mentioned as major external risks to its inflation forecast.
The committee members don’t rule out the possibility of a key policy rate hike in case the fundamental inflationary pressure rises or other pro-inflation risks emerge.
Nevertheless, the committee sees a number of positive factors that could serve as a basis for cutting the key policy rate. They include more lending under a new IMF-Ukraine financing program, a favourable situation on the foreign currency market, renewed interest of foreign investors in Ukraine’s government securities, and lower prices for imported energy resources. The positive results of a lowered key policy rate include the revival of crediting and a reduced deficit in the balance of payments.
The only committee member who spoke out for lowering the key policy rate said the implemented monetary policy has already restrained inflation. Meanwhile, a lowered interest rate would be a positive signal for the market to improve its expectations.
“January consumer inflation cooling to 9.2% y/y is likely to add more arguments for lowering the key policy rate during the next committee meeting on March 13. Should the downward inflation trend strengthen in February, the NBU is likely to resort to cutting its key policy rate by 0.5pp,” Evgeniya Akhtyrko of Concorde Capital said in a note.
52 UKRAINE Country Report March 2019 www.intellinews.com