The Board of the National Bank of Ukraine has decided to cut the key policy rate to 13.5% per annum effective 13 December 2019. The NBU speeds up the monetary policy easing, as the rapid appreciation of the hryvnia makes inflationary pressures decline faster than expected.
In November 2019, consumer inflation decreased sharply, reaching 5.1% yoy, which was below the NBU’s latest forecast. In such a way, inflation reached the medium-term target of 5%, set by the NBU in 2015.
The steady disinflation has been driven by a gradual easing of underlying pressures on prices, reflected in a slowdown of core inflation, and by lower energy prices. Inflation slowed markedly due to both the strengthening of the hryvnia and an improvement in inflation expectations. The above factors neutralized the pressure on prices from robust consumer demand and worse harvest of some vegetables.
The hryvnia strengthened due to several reasons. In October–November, the excess supply of foreign currency was mainly driven by proceeds from Ukrainian exports, in particular thanks to a record harvest of grain and oil crops, and selling foreign currency coming from borrowings of state-owned companies. Foreigners continued to invest in hryvnia government bonds, but it did not have major influence on the foreign exchange market, unlike in the past months.
The stronger hryvnia made inflation decline towards the 5% target faster than envisaged in the latest macroeconomic forecast. The NBU will publish the updated macroeconomic forecast, including the inflation forecast, at the end of January.
Reaching the staff-level agreement on the new cooperation program with the International Monetary Fund is an important milestone in the progress of structural reforms in Ukraine as well as in maintaining macrofinancial stability and steady economic growth.
The decision to cut the key policy rate to 13.5% was approved by NBU Board Decision No. 925-D On the Key Policy Rate, dated 12 December 2019.