Page 30 - Ukraine OUTLOOK 2024

close to 10% with inflationary expectations remaining fairly anchored and the risk of further CPI acceleration fully contained.
• 4.2 Monetary Policy
The NBU embarked on an easing cycle in the second half of 2023, prompted by the sharp disinflation. The key policy rate was cut by a cumulative 900 bps to 16% between July and December, and the rate on the overnight CD, the main liquidity absorption instrument, has fallen by 700 bps since April 2023. Real rates remain high and positive amid the decline in both inflation and inflation expectations.
The National Bank of Ukraine cut rates for the fourth time in 2023 on December 14 by 100bp to 15% thanks to falling inflation, which was 5.1% in November, as confirmed by Andriy Pishnyi, the head of the NBU.
Pishnyi highlighted that the decision aligns with the observed moderation in inflation and the positive shift in inflationary expectations and is aimed at preserving the attractiveness of hryvnia instruments for savings.
Despite the war and the heavy spending on defence, which now accounts for 20% of GDP, inflation has been falling steadily all year, allowing the central bank to cut rates multiple times.
The consumer price growth in Ukraine of 5.1% in November is the lowest figure since December 2020. Looking ahead, the NBU anticipates that inflation will fall a little more to 5% by the close of 2023.
However, potential risks loom. Challenges such as logistical issues on the western borders and the expedited depletion of the substantial impact of harvests, particularly in vegetables, pose threats of accelerated inflation, the NBU said. Moreover, the persistently high level of uncertainty due to the war poses major risks to the economic outlook.
Plummeting inflation made cuts in rates an obvious choice for the NBU. The key policy rate now stands at 15%, as of December 14, down from 25% at the start of 2023, while the rate on overnight CDs is down to 16% from 23%.
The NBU has experimented with monetary policy designs since December 2022, by introducing three-month certificates of deposits (CDs) and changing the bands around the key policy rate for liquidity-absorption and liquidity-provision operations.
Eventually in October, the NBU switched to a so-called floor regime, whereby the key policy rate sets the overnight rate on CDs.
This is an important precondition for gradual hryvnia depreciation that we believe the NBU will allow over the course of 2024. Only in 2H24, if inflation remains fully under control and the FX market stable, would the NBU choose to reduce the key policy rate by another 100-200bp.
Rates on UAH bonds were declining in 2H23 in line with inflation and multiple cuts in the cost of overnight funds by the NBU. By the end of 2023 ICU expects yields on UAH bonds to reach 15.5% for maturities below one year and 17-17.5% for longer maturities (vs. 19-21% at end-2022).
30 UKRAINE OUTLOOK 2024 www.intellinews.com