The Board of the National Bank of Ukraine has decided to cut the key policy rate to 17.0% per annum effective 19 July 2019. The NBU continues the cycle of monetary policy easing as inflation is declining towards the target of 5%.
After temporary factors caused a deviation from the target in previous months, annual consumer price inflation came in at 9.0% in June 2019, approaching the trajectory of the April forecast. Core inflation slowed to 7.4% in Q2, which was close to the NBU’s forecast.
The tight monetary policy remained a strong factor that held back underlying pressures on prices, in particular through strengthening of the exchange rate against currencies of trading partners and lower inflation expectations of households, businesses, banks, and financial analysts. At the same time, inflation remained relatively high due to the pressure from consumer demand, production costs, and rapid growth in administered prices.
Inflation will continue to decline gradually. The NBU reiterates its forecast that inflation will decline to 6.3% as of the end of 2019, return to the target range in early 2020, and reach the medium-term target of 5% at the end of 2020. The tight monetary conditions will continue to be the disinflation driver. Whereas the key policy rate is reduced gradually, its real value will remain high on the back of improved inflation expectations. High real interest rates will make hryvnia financial instruments more attractive for investors, which will support the exchange rate of the hryvnia. Moreover, such monetary policy stance will limit the pressure from consumer demand. Other factors behind the gradual disinflation will include:
● a prudent fiscal policy
● the slowdown in wage growth
● relatively low energy prices in the global markets
● ample supply of domestic and foreign food products.
In 2019–2021, the economy of Ukraine will grow steadily, at 3%–4%. The NBU has revised its economic growth forecast compared to the April macroeconomic forecast to 3% in 2019 (from 2.5%) and 3.2% in 2020 (from 2.9%) amid stronger domestic demand, more favorable terms of trade, and expectations of a larger harvest of grain crops.
Domestic demand will remain the main driver of economic growth over the coming years. Private consumption growth will decelerate, albeit remaining high owing to an increase in real household income – wages, pensions, and remittances from abroad. Capital investment will continue to grow rapidly, which will also provide significant support to the economy.
Economic growth will be dampened by a weak global economic activity and decrease in gas transit to European countries starting in 2020, due to the construction of bypassing gas pipelines.
