Hryvnia likely to rise to 5.20 against USD

Inflation dropped sharply

Inflation fell from 10.6% yoy in February to 8.7% in March. Especially food prices surprised to the downside. The prices of potatoes, vegetables and sugar, which rose much above 10% mom in February, rose only slightly or even fell in March. The gas price hike is not visible in the figures at the moment, but we expect that the new government will transfer the higher costs to the households in the coming months. The very benign inflation figures also show that the growth outlook is not getting better, as higher economic growth was one main reason for the high inflation in the Ukraine.

Recommendation and market outlook

The outlook for USD/UAH remains unchanged in the short run. We expect that the National Bank of Ukraine (NBU) will intervene to defend the UAH against a depreciation. At the moment the demand for USD is very strong, due to the uncertain political outlook. Our Ukraine (the party of president Yushchenko) said that they expect no coalition agreement until May when a new parliament convenes. However the NBU will unlikely destabilise the situation with a free falling UAH. Economic growth was very weak in the first two months of this year and we expect that the gas price hike should lead to a further deterioration of the growth outlook in the second half of the year. Inflation is very benign at the moment, but it should rise also in the second half of the year. Our forecast still foresees USD/UAH to rise to 5.20 at the end of the second quarter or even in May.

RZB Research