The Board of the National Bank of Ukraine has decided to leave the discount
rate unchanged at 22% per annum. The NBU Board’s decision to keep a
restrained monetary policy in place will help mitigate mounting risks to price
stability triggered by turbulence in the global economy and enable the NBU to
achieve its objective of lowering headline inflation to 12% by the end of 2016
and 8% by the end of 2017.
In the second half of 2015, headline inflation was on a firm downward path.
In annual terms, headline inflation moderated to 43.3%, which was broadly in
line with NBU projections. Core inflation continued to decline to 34.7% y-o-y.
The subdued domestic demand, NBU’s restrained monetary policy, and
stabilization of inflation expectations have contributed to the easing of
inflationary pressures in the last months of the year.
The NBU has kept its headline inflation projection unchanged at 12% by the
end of 2016 and 8% by the end of 2017. These projections are consistent with
the NBU’s medium-term inflation objectives.
The fundamental factors that were at play last year will further support
the disinflation trend this year. We primarily refer to subdued aggregate
demand. The NBU has revised its 2016 outlook for economic activity downward.
Real GDP is expected to grow at 1.1% in 2016. A
weaker-than-previously expected economic recovery can be attributed to
lower-than-expected global commodity prices, deteriorating global economic
growth prospects, and fresh trade restrictions imposed by the Russian
Federation, including a ban on the transit of Ukrainian goods through its
territory. A further decline in inflation expectations, cancellation of a
temporary surcharge on imports, as well as low global energy and food prices,
are among the factors supporting the downward trend in inflation.
On the other hand, a sharper decline in inflation will be restrained by
further upward adjustments in administrated prices.
The major downside risks to the inflation forecast and consequently the
achievement of the NBU’s 2016 inflation objective include external factors that
determine the balance of payments and the exchange rate path of the hryvnia.
The NBU has already revised its current account deficit forecast upwards to USD
2.5 billion, or 3% of GDP. Should downside risks materialize, this
deficit could be higher, which in turn would adversely affect the path of
inflation. These downside risks primarily include falling global prices for key
Ukrainian export commodities. Second, downside risks may arise from
depreciation of the currencies of Ukraine’s trade partner countries.
In view of the high likelihood of these risks to materialise and
the NBU’s commitment to its price stability objective, the NBU deems it
necessary to maintain the current monetary conditions.
Going forward, provided that inflationary risks subside primarily due to
stabilization of the global commodity markets and the disbursement of the next
tranches of official financing, the NBU may resume the gradual easing of
monetary policy. At the same time, should the aforementioned risksmaterialize, the
NBU will be forced to keep a restrained monetary policy in place for a longer
period to achieve its inflation objectives.
The decision on the discount rate is approved by NBU Board Resolution No.
40, dated 28 January 2016, On the Money Market Regulation.
A detailed macroeconomic forecast will be
published in the Inflation Report on 4 February 2016.
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