NBU keeps key policy rate unchanged at 17.5%

15:18, 06 June 2019
Economy
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REUTERS

"The decision was required to neutralize inflation risks, which have increased since the previous decision taken in April, and to attain the 5% inflation target next year," the NBU said in a press release on June 6, 2019.

Consumer price inflation has been above the NBU's forecast for two months running. In April, its annual reading was 8.8% and it continued to accelerate in May, according to NBU estimates. However, the acceleration is mostly driven by temporary factors, which include higher prices for some vegetables and fuel. In H2 2019, the effect of these factors will fade away as the new harvest becomes available for sale and global energy prices go down.

Underlying inflationary pressures continued to decrease gradually. This is reflected in core inflation declining since the start of the year, which is in line with the NBU's forecast. Inflation expectations have also improved a little.

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At the same time, domestic demand continued to increase rapidly. In particular, there was high growth in wages, retail turnover, construction, and industrial production in March-April.

Financial market volatility has also risen in recent weeks. This was due to speculative information about external public debt spread in the media, deliberations regarding the continuation of IMF financial support put off until a new government is formed, as well as threats to financial stability continuing to grow due to current court proceedings.

In addition, both external and internal risks remain substantial, as the NBU pointed out when making its previous monetary policy decision. Among other things, uncertainty persists in the country, which is usually the case during an election period.

The following external risks remain relevant: global recession and lower raw commodity prices, persisting geopolitical tensions, particularly due to trade conflicts, uncertainty over the volume of gas transit through Ukraine starting in 2020, as pipelines bypassing the country are being built to deliver gas to Europe, and the development of the military conflict and new trade restrictions introduced by Russia.

"As before, the NBU Board thinks that the monetary easing cycle could continue if inflation risks decrease and inflation expectations improve steadily," the NBU said.

The next meeting of the NBU Board on monetary policy issues will be held on July 18, 2019, as scheduled.

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