Page 46 - UKRRptMar20

8.2 ​Central Bank policy rate
Ukraine’s prime interest rate could fall 7% next summer – six months ahead of schedule​, Economy Minister Timofei Milovanov told the Rada Economic Development Committee in February. On March 12, at the next meeting of the National Bank of Ukraine Board, the prime rate could be cut by 200-250 basis points. After the Jan. 31 cut of 250 basis points, prime is 11% -- more than triple the inflation rate of 3.2%. At that meeting, Yakiv Smolii predicted that the prime rate at year’s end will be 7%.
The National Bank of Ukraine (NBU) disclosed more details of its January decision to cut its key policy rate ​by 2.5pp to 11.0%​ i​ n its minutes of the monetary policy committee meeting published on February 10. It revealed that committee members unanimously agreed to review the forecasted trajectory of the key policy rate in favor of more intense monetary softening.
The committee members noted that fundamental inflationary pressure is weakening faster than expected. At the moment of the meeting, the consumer inflation in January dropped below the target range of 4-6%, according to NBU estimates. The effect of hryvnia appreciation in 2019, coupled with relatively low prices for energy resources and expected higher production of fruits and vegetables, should restrain price growth this year, keeping inflation below target range, the NBU expects.
Six out of ten committee members spoke for cutting the key policy rate by 200 bps to 11.5%. They emphasized that growth in consumer demand will stay high, being stimulated by accelerating wages and much “deferred consumer demand” related to the crisis of 2014-2015. The aggressive lowering of the key policy rate might result in a surge in consumer inflation in 2021.
Two committee members favored cutting the key policy rate by 250 bps to 11.0%, arguing that a drastic cut in the key policy rate is more appropriate in terms of significant inflation cooling. They noted that the volatility of the exchange rate in January was in “an acceptable range”, and its influence on inflationary expectations will be limited.
This group also noted that a faster cut in the key policy rate should not have an adverse effect on the banking sector in terms of runs on UAH-denominated savings deposits, as the bank’s interest rates will remain high enough to be an attractive investment instrument.
The committee's remaining two members advocated cutting the key policy rate by 350 bps to 10%, arguing that there are high risks that inflation will be lower than currently projected. Therefore, a drastic cut in the key policy rate would be justified.
46​ UKRAINE Country Report​ March 2020 ​ ​www.intellinews.com