Page 52 - UKRRptJul21

“Inflation is at 9.5% and policy rates only at 7.5%, that is a big negative rate differential in an environment when the market seems to be becoming increasingly focused on higher US rates and inflation,” Ash added.
Inflation has been rising across the region since the start of this year, largely driven by rapidly rising food prices, as bne IntelliNews explored in its DATACRUNCH deep dive into inflation in May.
The NBU was the first out of the gate and the first central bank in the Commonwealth of Independent States (CIS) to hike in March (50bp) and then again even more aggressively in April (100bp) as inflation continued to stubbornly rise. It was the NBU’s commitment to bring down inflation that persuaded analysts it would hike again this month.
The return of inflation has been a disappointment for the NBU which successfully brought inflation down to post-Soviet record lows in 2019 and 2020, reaching a nadir of a mere 1.7% in May last year, that allowed the NBU cut a full 12% off rates in a little more than a year.
Now inflation is back at a two-year high and the easing cycle in the entire region seems to be definitely over. In May inflation exceeded the expectations of both analysts and the central bank.
Food prices are expected to retreat in the coming months as the summer gets underway. The conclusion of a new Stand By Agreement (SBA) with the International Monetary Fund (IMF) would also help by bringing funds that will allow the hryvnia to strengthen which has a disinflationary effect, but that still seems a remote possibility at this point. Nevertheless, the currency has gained 5.3% against the dollar this year reports Bloomberg, making it one of the world’s top performers.
The NBU justified its decision by saying that it doesn't see any underlying inflationary pressures and hence no need to hike rates, suggesting the previous 100bp hike has had its affect and has already turned the tide.
“Although remaining high, inflation expectations of businesses and households have stabilized over past months,” the bank said in a statement.
“Maybe the decision to stay pat on rates reflects the strength of the UAH, with the NBU accumulating reserves again recently, and perhaps the administration now wants a weaker currency to kick on with growth,” says Ash. “There is a sense also that the Zelenskiy administration is pulling away from IMF conditionality so maybe the changes in NBU management made over the past year are finally coming home to roost with a pro growth agenda being rolled out.”
Seven out of ten members of the monetary policy committee (MPC) of the National Bank of Ukraine (NBU) supported the maintenance of the refinancing rate at 7.5% on June 16, three more committee members proposed to act more decisively and raise the rate to 8%.
52 UKRAINE Country Report July 2021 www.intellinews.com