NBU releases inflation outlook for 2021

The Ukrainian economy is beginning to recover from crisis, but still needs a stimulating monetary policy, as stated following the discussion involving members of the National Bank's monetary policy committee on the key rate level.

In the context of a high level of uncertainty over the spread of coronavirus, citizens and enterprises are likely to remain being rather restrained in their consumer and investment decisions. This will slow down the recovery in business activity. Accordingly, the economy needs a stimulating monetary policy, the NBU press service wrote.

Inflation and price growth

According to the data released by the NBU, the inflation trend has reversed in recent months. The rise in energy prices on world markets and the gradual recovery in demand accelerated the rise in prices. At the end of this year, inflation will be close to the NBU's target of 5%. But in 2021 it may grow closer to the upper limit of the target range of 5% + / - 1 p.p.

Key rate

In such conditions, keeping the key rate at 6% is the best solution. On the one hand, the key rate is holding at a record low, leaving enough room for banks to further reduce deposit and lending rates. Previous key rate cuts have not yet fully affected bank rates. On the other hand, the decision is aimed at ensuring moderate inflation in 2021-2022, which is important for sustainable economic growth. Maintaining the rate at 6% was supported by seven of 10 committee members. Three spoke in favor of reducing the rate to 5.5%. Members also see differently the further trajectory of the key rate. Five members expect the rate to remain at the current level at least until the end of 2020. Three see potential room for further declines in the short term. Two suggested the possibility of a rate hike at the end of this year.

Background

• The International Monetary Fund has worsened the forecast for the fall of the Ukrainian economy in 2020 to 8.2% from 7.7%, which was released in April.

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• According to its forecasts, the recovery of the Ukrainian economy after the recession caused by the coronavirus pandemic to pre-crisis indicators may continue until 2023-2024.
• The Ministry for Development of Economy, Trade and Agriculture, in an updated macro forecast for the next three years, predicts an increase in the gross domestic product of Ukraine in 2021 by 4.6%, and in 2022 and 2023 – by 4.3 and 4.7%, respectively.
• Since June 12, the National Bank of Ukraine has reduced the key rate to a historic low of 6% per annum.
• On July 23, 2020, the National Bank of Ukraine kept the key rate at the same level – at 6% per annum after reducing it in June for the eighth time in a row – to a historical minimum.
• On July 31, 2020, the National Bank of Ukraine estimated the GDP decline in Q2 2020 at 11% in annual terms.