National Bank of Ukraine raises interest rates

The National Bank of Ukraine (NBU) increased its key interest rate by 0.5 basis points to 18 per cent on September 6, in order to ensure that inflation – in decline since the start of the year – continues its downward trend.

“The tighter monetary policy will help bring inflation to its target range in late 2019 and to achieve the medium-term target of five per cent in 2020,” said the bank in a statement.

In July 2018, consumer price inflation continued to decelerate, reaching 8.9 per cent year-on-year and closely approaching the target range set in its monetary policy guidelines for 2018 and the medium term (6.5 per cent). According to the NBU’s preliminary estimations, in August, inflation was also close to this level.

The decline in inflation in July was generally in line with the most of the recent macroeconomic forecasts of the NBU. A sizeable increase in the imported supply of food products, which dampened price growth, contributed to lower inflation. In addition, hryvnia appreciation in the first half of the year influenced the price of non-food products.

Core inflation decelerated in July, to 8.8 per cent year-on-year, which was also expected by the NBU. However, core inflation remaining high indicates that the underlying inflationary pressure is persistently strong. This is mainly the result of the rapid growth in real wages, leading to higher production costs and sustained consumer demand.

Further slowdown in inflation will be constrained by the expected increase in administered prices in the fourth quarter of 2018, which is aimed at bringing domestic gas prices closer to the import parity price.

The bank announced its decision on the same day that an International Monetary Fund mission arrived in Kyiv for a fresh round of talks with officials. The NBU said co-operation with the IMF remained “the major precondition for bringing inflation down to the target.”