Ukraine's National Bank keeps key policy rate at 6%

19:58, 23 July 2020
Economy
246 0
REUTERS

"The Board of the National Bank of Ukraine has decided to keep its key policy rate at 6% per annum. This on the one hand will curb price growth as the economy recovers in 2021–2022, while on the other hand leaving room for further decreasing the cost of credit to one-digit levels," the regulator's press service said on its website on July 23.

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The NBU has revised its forecast of how much real GDP will drop in 2020 as a result of the coronavirus crisis, from 5% to 6%. The low-point of the fall was passed in the second quarter (Q 2). The economy of Ukraine will contract by 6% in 2020 but will resume growth at the level of around 4% in subsequent years, the report said.

"In 2021–2022, the Ukrainian economy will grow, thanks to monetary and fiscal stimuli and higher foreign demand. Economic growth will mainly be driven by private consumption," newly appointed NBU Governor Kyrylo Shevchenko said at a briefing on July 23.

In the second half of 2020 (H2), the economy started to recover. With the quarantine restrictions eased, there has been a pickup in business activity. Business activity and private consumption were given additional support by the NBU's stimuli, loan repayment holidays, tax relief, and increased unemployment allowances from the budget.

"However, the pace of economic recovery will be restrained, as consumer and investment demand remain subdued. During the crisis, households significantly cut their spending on non-staple goods, while businesses put their development plans on hold and revised their staffing levels and payroll funds. Considering the high level of uncertainty over the spread of the coronavirus, both the public and businesses are likely to remain cautious about their consumer and investment decisions," the NBU governor said.

Given the gradually accelerating inflation and the above balance of risks, the NBU Board kept the key policy rate unchanged, at 6%, the official added.

"The NBU expects to keep the key policy rate at the current low level at least until the end of the current year. Next year, the NBU will take decisions on the key policy rate taking into account whether or not inflationary risks materialize, how social standards change, and at what pace the economy is recovering," he said.

According to Shevchenko, previous key policy rate cuts have not been fully transmitted to the cost of financial resources – the banks are still continuing to cut their loan and deposit rates. However, anchoring interest rates at the single-digit level requires that financial market participants be confident that economic policy is consistent and that there is a reasonable balance between inflation curbing and monetary stimulus.

"By keeping the key policy rate at 6%, the NBU leaves enough room for monetary stimulus in order to provide the economy with additional impetus for growth if consumer and investment demand recover more slowly than expected," he summed up.

The next monetary policy meeting of the NBU Board will be held on September 3, 2020, as scheduled, the press service said.

As UNIAN reported earlier, the National Bank cut the key rate to 6% per annum effective from June 12, hitting a historic low in independent Ukraine.

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