The Board of the National Bank of Ukraine has decided to cut the key policy rate to 16.5% per annum, effective 6 September 2019. The NBU is continuing the cycle of monetary policy easing, as it expects inflation to decline to the target of 5%.
In July, inflation was at 9.1% yoy, which was above the forecast trajectory published in the latest Inflation Report. The NBU expects inflation to have declined in August, although still remaining above the forecast level. The deviation was mostly driven by temporary factors related to food supply, in particular the supply of vegetables.
The NBU Board said that internal political risks to reducing inflation to its target decreased after the new convocation parliament started to operate and a new government was formed. This makes it possible to intensify negotiations on a new cooperation program with the International Monetary Fund. At the same time, threats to financial stability are still arising from current court proceedings related to the decisions made by the state aimed at recovery of the banking sector.
The external risks identified by the NBU Board at the previous monetary policy meeting in July still persist. These include:
● a suspension of Russian gas transit through Ukraine starting in 2020
● increased trade tensions and more turbulent global financial markets
● an escalation of the military conflict and new trade restrictions introduced by Russia.
The NBU will continue the cycle of monetary policy easing, provided inflation is steadily declining to the target of 5%. How quickly the key policy rate is reduced to its neutral level of 8% will depend on both internal and external risks.
The decision to cut the key policy rate to 16.5% has been approved by NBU Board Decision No.645-D On the Key Policy Rate dated 5 September 2019.