Concorde Capital Research: Ukraine central bank lowers key policy rate to 17.5%, updates macro forecast

The National Bank of Ukraine (NBU) announced on Apr. 25 it decided to lower its key policy rate by 0.5pp to 17.5% at its monetary policy board meeting that day. After having kept it unchanged at 18.0% since July 2018, the central bank noted that a sustainable inflationary slowdown towards its target of 5% has enabled it to begin a cycle of reducing the rate. However, the NBU noted it still sees risks that could prevent further lowering. In particular, consumer inflation has cooled to 8.6% yoy in March. In addition, core inflation slowed to 7.6% yoy, lower than expectations. The central bank believes that tight monetary policy was the major factor in curbing inflation, as well as causing appreciation of the national currency. Despite the economy being at the peak of the election cycle, the financial situation remains favorable, the central bank noted, helping to improve the inflationary expectations of business and individuals. The NBU also confirmed its inflation forecast of 6.3% yoy in 2019 and 5.0% yoy in 2020. The upper end of the 4-6% target range should be reached in the beginning of 2020. This result will be achieved due to tight monetary policy and prudential fiscal policy. As additional inflation restraining factors, the NBU cited a slower pace of wage growth, the appreciation of the national currency, lower prices for natural gas on global markets and higher supply of domestic and imported foods. Like in January, the central bank expects Ukraine’s GDP growth to slow to 2.5% yoy in 2019 (from 3.3% yoy growth in 2018) due to cooling in global economy and trade, a restrained fiscal policy with regard to high debt repayments and tight monetary policy needed for reaching its inflation target. The NBU expects real GDP growth to accelerate to 2.9% yoy in 2020 and 3.7% yoy in 2021. According to NBU’s forecast, the current account deficit will remain at 3.6% of GDP in 2019, but it will swell to 4% of GDP in 2021 due to falling gas transit and weak export opportunities. The key assumption of the NBU’s forecast is Ukraine's continued cooperation with the IMF and its access to global financial markets. If these conditions hold, the NBU expects to keep its gross international reserves at USD 21-22 bln in 2019-2021. The NBU cited the increasing uncertainty related to the presidential and parliamentary elections in 2019 as a major risk to its projections. Evgeniya Akhtyrko: We didn’t expect the NBU to decide to lower its key policy rate at this meeting. In our opinion, it would be wiser to keep it at 18%, as we see increased risks to the main assumption of the NBU's forecast, which is continued IMF cooperation. Firstly, the statements of President-elect Volodymyr Zelenskiy and his team regarding further IMF cooperation are highly inconsistent. At this moment, there is no guarantee that the new political leadership continue along the same consistent path set by the Poroshenko administration. Secondly, the recent court rulings against the nationalization of Privatbank will inevitably be a point of discussion during the IMF mission to Ukraine next month. Recall, the IMF made much efforts to force the Ukrainian government to solve the problem of Privatbank's insolvency back in 2016, and the decision of the Ukrainian government to nationalize Privatbank was significantly motivated to meet IMF requirements. We see that a positive decision by the IMF on issuing a new loan tranche to Ukraine is in jeopardy unless the government provides convincing evidence that the mounting activity around Privatbank's status will has no major impact on the country's financial stability in the mid-term. All in all, the central bank's decision sends a misleading signal to business and the public as it overlooks (intentionally or unintentionally) the rising risks posed by the change in political leadership.

• Full name
  The National Bank of Ukraine