Ukraine’s MPC minutes show worries over inflation and war

Some MPC members warn NBU may have to continue tightening rates as pressures mount
The National Bank of Ukraine
The National Bank of Ukraine
Oksana Parafeniuk

Some members of the Ukrainian central bank’s monetary policy committee warned it might need to continue raising rates, a record of its last meeting shows.

The National Bank of Ukraine MPC’s 10 members voted unanimously to raise the policy by 100 basis points to 7.5% rate on April 15. This was the NBU’s second rate rise of the year, after it increased the policy rate by 50bp on March 4.

Inflation has risen for the last six consecutive months in Ukraine, according to official figures, from 2.3% in September to 8.5% in March. The NBU published a summary of the meeting on April 26, saying that inflationary pressures were rising both in Ukraine and its major trading partners.

Food and fuel prices were rising, as was consumer demand, fuelled by higher real incomes, the record said. “On the other hand, higher core inflation suggests that underlying inflationary pressures also intensified significantly,” the NBU noted.

Most MPC members thought the tighter policy would bring inflation back to the NBU’s 2021 target of 5% for 2020, plus or minus one percentage point.  A majority said that the two rate rises would be “sufficient to bring inflation close to 5%” in the first half of 2022. 

The record added that “a de-escalation of hostilities” in Ukraine’s military conflict with Russian-backed separatists “is an important prerequisite for this scenario”.

But at least two members warned that the NBU might need to continue raising rates, with one saying that market conditions meant that policy was still accommodative. One MPC member cautioned that political events could mean Ukraine’s economy follows a significantly worse path in 2021 than the NBU’s forecast.

The NBU’s baseline scenario assumes that Ukraine will secure a deal with the International Monetary Fund in the summer, that member said. It also assumes that the war with the Russian-backed separatist forces “will not escalate”, that member noted.  

The IMF halted disbursement of its $5 billion loan to Ukraine after former NBU governor Yakiv Smolii was dismissed by president Volodymyr Zelensky in July. It has said further loan tranches will only be made available if the Ukrainian government supports central bank independence and backs economic reforms.

Another MPC member noted that both retail banking deposits and consumer demand had strongly increased in recent months. They argued that surplus liquidity in Ukraine’s banks was weakening the transmission of monetary policy, with banks slow to raise deposit rates.  

But the document said there were signs that financial markets were beginning to respond to tighter policy. “Specifically, most interest rates on deposits of various maturities stopped declining in early April and some of them have edged higher,” it noted.

NBU first deputy governor Kateryna Rozhkova, an MPC member, posted a statement on her Facebook account on April 27 saying the rate rise was the correct decision. Rozhkova is seen as an important economic reformer by officials in the IMF and donor nations. Governor Kyrylo Shevchenko has clashed several times with Rozhkova over her criticisms of central bank policy.

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