Ukraine’s central bank goes back to 5% inflation target

The National Bank of Ukraine has reaffirmed its goal of reducing inflation to 5% by the end of 2019, after more than a year of being unable to meet its monetary policy targets.

On July 12, the NBU raised its policy rate by 50 basis points to 17.5%, saying it was necessary, despite falling headline and core inflation. Ukraine’s year-on-year inflation fell to 9.9% in June – the lowest figure for more than a year.

Four days later, on July 16, the central bank published a revised inflation strategy, setting a goal of 5% inflation by the end of 2019, plus or minus one percentage point.

In a statement released on July 12, the NBU said the fall in headline inflation was largely caused by better-than-expected food supply, caused by hot weather conditions. The central bank said core inflation fell to 9%, which it described as lower than expected, but still a sign of high inflationary pressure.

Core inflation’s continuing strength was largely due to “sustained growth in consumer demand”, led by “a rapid rise in incomes that substantially outpaces the rates of economic growth”, the NBU said.

But the central bank predicted that monetary policy would be able to reduce inflationary pressure in the second half of 2018 and in 2019. Tighter monetary policy should be able to curb “higher than expected domestic demand”.

It should also be able to influence inflation expectations, which were currently running ahead of the NBU’s inflation targets. There would be less demand for Ukrainian sovereign debt “as a result of the global trend of exiting developing countries’ assets”.

The NBU’s new inflation goal for 2019 effectively returns to the aims of its monetary policy strategy for 2016-2020, which the central bank’s board approved in August 2015. The document was its first explicit inflation target and one of a series of major reforms by then-governor Valeria Gontareva.

The strategy envisaged 12% inflation, plus or minus three percentage points, by December 2016; and 8%, plus or minus two percentage points, a year later. The NBU then aimed for 6%, again plus or minus two percentage points, by the end of 2018; and 5%, plus or minus one percentage point, by 2019.

Ukraine’s inflation was 12.4% in December 2016, within the NBU’s target range. But the central bank failed to meet its 2017 goals, after an unexpected surge in inflationary pressures.

Between May 2017 and March 2018, Yakiv Smolii served an unexpectedly extended period as interim governor, after Gontareva resigned and Ukrainian politicians failed to agree on a successor. Smolii’s position was ultimately made permanent.

New deputy governor takes up role

The NBU also announced on July 23 that Sergii Kholod has taken up his role as deputy governor in charge of payment systems and cash circulation. 

He was appointed to the role on June 15, by the central bank’s governing council, after being chosen in what the National Bank of Ukraine described as a public, transparent process. He will take charge of the National Bank of Ukraine’s payment systems and cash-circulation operations.

Kholod’s responsibilities will include oversight of the NBU’s mint and banknote-printing works, as well as the IT department. He will have a seat on the board of the central bank, along with governor Smolii, first deputy governor Kateryna Rozhkova and three other deputy governors.

The NBU’s payment systems department has additional responsibility for encouraging technological innovation in Ukraine’s financial sector. When Kholod was nominated, Smolii described him as the candidate best qualified to help the central bank expand Ukraine’s cashless payment systems and encourage new fintech initiatives.

Smolii said Kholod combined experience of working at both the NBU and in the private sector, and praised his “experience of building and developing the NBU electronic payment system”. The governor said Kholod’s return to the central bank would “bring a new strategic vision of the innovative development of the central bank and the banking sector”.