Ukraine holds rate, switch to easing depends on inflation
Ukraine’s central bank kept its policy rate at 18.0 percent due to risks that inflation may not decline but said it may adopt a monetary easing cycle in the future and how soon depends on how steadily the risks of inflation ease and inflation expectations improve.
”Looking ahead, any changes to the key policy rate will be based on the NBU’s updated macroeconomic forecast that will be published in April,” the National Bank of Ukraine (NBU) said.
Ukraine’s central bank moved into a monetary tightening cycle in October 2017 and raised rates 6 times by a total of 550 basis points until September 2018. Since then rate has been unchanged.
But despite tight monetary condition, which helped boost the hryvnia’s exchange rate, inflation remained above the NBU’s end-2018 target of 6.0 percent, plus/minus 2 percentage points, due to an array of factors such as higher administered prices and pensions, higher tariffs and oil prices, along with strong consumer demand and higher wages.
By the end of 2018 headline inflation had only eased to 9.8 percent but in the last two months inflation has fallen and reached 8.8 percent in February, “signifying that the underlying inflationary pressure is easing off as anticipated,” NBU said.
However, the central bank said continued tight monetary conditions are still an important prerequisite for gradually lowering inflation to its target of 5.0 percent in 2020.
In its January inflation report, NBU forecast inflation would ease to 6.3 percent by the end of 2019 and then decline to the upper bound of its target range of 5.0 percent, plus/minus 1 percentage point, early next year before reaching the midpoint target by the end of the year.
NBU said this forecast still holds although an increase in social payments and higher utility tariffs are planned, which could boost inflation expectations. On the other hand, the hryvnia’s has strengthened more than expected, helping curb inflation.
Administered prices are set to rise 13.6 percent this year, mainly due to an increase in natural gas tariffs for households as part of the agreement with the International Monetary Fund. (IMF). In the medium term, the rise in administered prices slows to 10 percent in 2021.
Since September last year the hryvnia has steadily strengthened and today it was trading at 26.88 to the U.S. dollar today, up 2.4 percent this year.
The National Bank of Ukraine issued the following statement:
Source: http://www.centralbanknews.info/2019/03/ukraine-holds-rate-switch-to-easing.html
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