Business news from Ukraine

NATIONAL BANK OF UKRAINE KEEPS KEY POLICY RATE UNCHANGED AT 6%

The Board of the National Bank of Ukraine (NBU) decided to keep the key policy rate unchanged at 6%, the central bank said on its website on Thursday.
“The NBU Board has decided to keep its key policy rate at 6% per annum. Maintaining a loose monetary policy will support economic recovery amid moderate inflation and elevated uncertainty over how the pandemic is going to spread in Ukraine and the world,” the central bank said.
The NBU said that in July–August, inflation was below the target range of 5% ± 1 pp. The dynamics of core inflation were subdued.
The revival in consumer demand and the rise in fuel and natural gas prices in line with global market trends were offset by seasonal adjustments in raw food prices, the regulator said.
The central bank said that future movements in inflation will depend on how fast the economy recovers. Data on imports, the retail trade, and household expenditures on domestic tourism, real estate, and cars indicate a further recovery in consumer demand, which is likely to continue in the coming months.
“The NBU’s monetary policy easing cycle and the government’s fiscal stimulus, including changes in social standards, will support this trend,” the central bank said.
At the same time, energy prices will continue to increase as the global economy gradually recovers from the coronavirus crisis. The statistical effect of the low comparison base formed in the final months of last year will make a significant contribution to the overall rate of inflation. All of this paves the way for inflation to enter the target range by the end of the year.
According to the press release, the primary assumption behind the NBU Board’s decisions remains that Ukraine will continue to cooperate with the International Monetary Fund (IMF).
“This cooperation is important not only in terms of financing the state budget deficit, but also from the perspective of receiving support from other international partners and investors. Funds from these sources will go to finance anti-coronavirus measures and infrastructure projects, which will help jump-start the still weak investment activity,” the NBU said.
As before, a longer-lasting coronavirus pandemic, the further spread of the disease and stricter quarantine measures remain the key risks to macrofinancial stability, according to the press release.
“The increase in the number of coronavirus cases in Ukraine seen in recent months has not affected the pace of economic recovery. Nevertheless, a new wave of COVID-19 could restrain consumer demand and slow the recovery in domestic-market-oriented sectors, especially the services sector,” the regulator said.
According to the report, other risks also remain significant. They include: the negative impact of certain court rulings on macrofinancial stability; an escalation of the military conflict in eastern Ukraine or on the country’s borders; and the higher volatility of global food prices, driven by global climate change and the risk of stronger protectionist measures.
“Given the above balance of risks and the steady trend towards a recovery in consumer demand, the NBU Board kept the key policy rate unchanged, at 6%,” the central bank said.
The regulator said that the fact that the key policy rate is being kept below its neutral level shows that monetary policy is expansionary. The policy also leaves enough room for further interest rate cuts in the economy.
Previous key policy rate cuts are continuing to be transmitted to market rates. More specifically, interest rates on hryvnia domestic government debt securities and hryvnia deposits are at record lows. Loan rates are also continuing to fall.
According to the report, under current circumstances, the key policy rate of 6% is aimed at keeping the balance between maintaining moderate inflation and stimulating the economy. However, if the adverse impact of the coronavirus pandemic on domestic demand and business activity increases, the NBU will be ready to give the economy additional impetus for growth.
Conversely, the NBU could also deploy monetary policy tools to respond to the likely increase in inflation risks in 2021.

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NATIONAL BANK MAY RAISE ITS KEY RATE TO AT LEAST 18%

The National Bank of Ukraine (NBU) may raise its key refinancing rate to at least 18% in September, bankers polled by Interfax-Ukraine say. “The refinancing rate in September may grow by 0.5%, while the increase in the rate will indirectly help ease the pressure on the hryvnia. Following the increase in the refinancing rate, bank deposit and interest rates may grow by 0.5%,” Governor of Bank RwS Vladyslav Kravets has said.
The head of the financial department at Ukrgasbank Viktor Pasternak also predicts that the NBU will raise the key rate in September.
“The National Bank of Ukraine’s increase in the refinancing rate may be within one percentage point. Now the hryvnia is seeing its seasonal weakening, which in turn affects inflation, and an increase in the NBU’s refinancing rate helps curb the inflation,” he said.
According to Pasternak, raising the key rate raises the cost of the hryvnia, but it will not directly influence the exchange rate of the hryvnia.
Head of the investor relations department at Credit Dnepr Bank Andriy Prikhodko also forecasts growth of the refinancing rate.
“The deterioration of financing conditions for Ukraine against the background of the acceleration of the devaluation in August creates prerequisites for raising the refinancing rate, so a small increase in the refinancing rate is possible. A tough monetary policy will increase the profitability and attractiveness of hryvnia instruments, which should reduce pressure on the rate (hryvnia) and inflation. The increased key rate will directly affect the yield of government domestic loan bonds and deposit certificates, the impact on rates on bank deposits and loans will be more indirect and with a certain time lag,” he said.
Governor of Piraeus Bank Serhiy Naumov also forecasts the refinancing rate may increase slightly in September.
“Despite the fact that inflation slowed this summer, inflation expectations are still high, we are entering the autumn period when the exchange rate is growing seasonally and the likelihood of gas price hikes for households is high, so I believe that the NBU can once again consider an increase in the rate. But I don’t think it will be drastic. If the key rate grows, I think rates on both bank deposits and loans will go up, but not immediately and not crucially,” the banker said.

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