Ukraine raises rate 3rd time and sees further hike
Ukraine's central bank raised its key interest rate for the third time this year and expects to raise it further, saying this monetary tightening is necessary to return inflation to its target by 2022.
The National Bank of Ukraine (NBU) raised its key policy rate by another 50 basis points to 8.0 percent and has now raised it by 200 points this year following earlier hikes in March and April.
The National Bank of Ukraine (NBU) raised its key policy rate by another 50 basis points to 8.0 percent and has now raised it by 200 points this year following earlier hikes in March and April.
Last year the central bank slashed its rate 5 times and by 7.50 percentage points to cushion the economy from the COVID-19 pandemic but with economic activity recovering and prices rising, NBU is slamming on the brakes to prevent inflation accelerating further.
"The NBU's forecast envisages that the key policy rate will be raised further, to 8.5%, and maintained at that level until Q2 2022, with a view to brining inflation back to its 5% target in 2022, and keeping inflation expectations in check," said the bank.
If additional pro-inflationary risks materialize, the central bank said it was ready to continue deploying monetary tools to ensure inflation returns to its target.
Inflation in Ukraine has been above the bank's target of 5.0 percent, plus/minus 1 percentage point, every month this year and the central bank expects it to rise further to over 10 percent in coming months from 9.5 percent in June before it begins to ease and return to the target in second half of 2022.
"With global prices surging and demand recovering further, the NBU has revised its 2021 inflation forecast from 8% to 9.6%," the bank said.
The rise in inflation is partly due to a temporary rise in global food and energy prices but NBU also said underlying inflationary pressures have intensified significantly due to strong consumer demand and rising production costs, particularly wages.
Robust consumer demand and improving trade conditions will help Ukraine's economy make up for any losses sustained from lockdowns to contain the virus during the winter and spring, the central bank said, maintaining its forecast for economic growth this year of 3.8 percent and 4.0 percent in 2022 and 2023.
In addition to the rate hike, the bank's board said it was taking additional measures to tighten monetary policy by continuing to phase out its anti-crises measures, noting liquidity in the banking system is high and exceeded 200 billion hryvnia as of July 22.
Last month the NBU decided to begin phasing out stimulus measures from last year and today decided to set the rate on refinancing loans to banks at the policy rate plus 1 percentage point and lower the planned amount of daily interventions to purchase foreign exchange to US$5 million from $20 million.
"If financial markets suffer no major shocks, long-term refinancing and interest rate swaps will be suspended from 1 October 2021," the NBU said, adding it will also consider reducing the terms of regular refinancing loans in September.
The National Bank of Ukraine issued the following two statements. First the monetary policy decision and secondly a statement about the change to its monetary policy operations:
"The NBU Board has decided to raise the key policy rate to 8% per annum. Given the significant increase in underlying inflationary pressures, this step is necessary to return inflation to 5% in 2022 and keep inflation expectations in check.