Dear colleagues,
I would like to greet all the
participants at our traditional meeting following the Board's monetary policy
meeting. I would like to inform you that the Board of the National Bank of
Ukraine continues to pursue a restrained monetary policy. We have decided to
leave the discount rate unchanged at 22% per annum.
The Board’s decision to keep the
current monetary policy in place is consistent with the NBU’s primary objective
of achieving and maintaining price stability in the country. This move will
help mitigate risks to price stability. These risks are growing amid
global financial and commodity markets turbulence. This move will
also enable the NBU to achieve its objective of lowering inflation to 12% by
end-2016 and 8% by end-2017.
Last year’s inflationary dynamics
was in line with NBU projections. In the first four months of 2015 prices
skyrocketed, driven by the hryvniaexchange rate overshooting and upward
adjustments in administrated prices, whereas in the second half of the year
headline inflation was on a firm downward trend, having increased by less than
2%. In annual terms, headline inflation moderated to 43.3%, down from 60% in
April. Core inflation continued to decline to 34.7% y-o-y.
The subdued domestic demand,
NBU’s restrained monetary policy, 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 end-2016 and 8% by
end-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.
I primarily refer to subdued
aggregate demand. The NBU has revised its 2016 economic growth
outlook downward. Real GDP is expected to grow at 1.1% in 2016. As
Ukraine is a small and open economy, its development path is exposed to the
global economic environment.
The global economic growth prospects keep looking
more and more bleak. Foreign exchange proceeds from exports of raw
materials account for the largest share of export revenues of the emerging
market economies.
Unfortunately, Ukraine is no
exception. The domestic economy has to undergo structural reforms to become
less vulnerable to external shocks. But today Ukraine’s economic growth is
overly exposed to global commodity market developments.
According to our assumptions,
global commodity prices will remain low over the next two years due to the
relatively weak demand and existing mismatches between the supply and demand.
The oil supply glut is expected
to stay in the period ahead due to the heightened competition between the
oil-producing countries. In particular, Saudi Arabia has refused to reduce its
oil production. Iran, which has recently returned to the global oil
market, is likely to ramp up its oil production amid the lifting of the embargo
on its oil sales by the US and a rapid build-up of oil in U.S.
inventories.
At
the same time, the economic slowdown in China, which is seeking to shift its
economic development model, and weaker economic growth in other emerging
markets are expected to dampen global oil demand.
As
a result, global energy prices, particularly that of oil and natural gas, are
unlikely to recover this year.
On the upside, Ukraine will
benefit from low energy prices. On the downside, low oil prices push
down prices for food and steel, which account for the largest share of
Ukraine's export revenues.
The other restraining factors
include restrictions on export of Ukrainian goods to the Russian Federation and
a ban on the transit of our goods to Asian countries
through the territory of the Russian Federation.
Apart from subdued demand, a
further decline in inflation expectations will support the downward trend in
inflation. The cancellation of a temporary surcharge on imports and
low global energy and food prices are yet other contributing factors.
The absence of fiscal dominance
will enable the NBU to meet its inflation objective. Naftogaz of
Ukraine NJSC will not require funding from the NBU. It will be the first year
when Naftogaz of Ukraine NJSC is projected to run a zero deficit.The Deposit
Guarantee Fund’s funding needs will be limited in scope as the main phase of
the banking sector clean-up is completed. Furthermore, we expect the
DGF to meet its funding needs through the sale of failed banks'
assets.
Two state-owned banks – and Oschadbank and Ukreximbank –
require additional capital in the amount of UAH 15 billion. Their capital will
be increased through the issuance of long-term government bonds, which the NBU
does not intend to monetize.
Why, despite having such
expectations, do we keep the discount rate at 22% for the third time in a row?
Even with fundamental drags on
inflation, the NBU is aware of short-term external factors that are beyond the
monetary policy control. These factors have the potential to exert pressures on
the FX market, and consequently, prices.
In 2015, as projected and
repeatedly stressed by the NBU, Ukraine’s current account was balanced and ran
a small deficit of 0.2%, which was within the norm.
The NBU has already revised its
2016 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 are
as follows:
· First, a further decline in global prices for key
Ukrainian export commodities;
· Second, downside risks may arise from depreciation of
the currencies of Ukraine’s trade partner countries.
What potential implications will
these developments have for the NBU’s monetary policy?
The materialization of these
risks may pose a threat to the NBU’s objective of lowering inflation to 12% by
end-2016. Therefore, we have decided to maintain the current
monetary conditions.
Going forward, provided that inflationary
risks abate as the global commodity markets stabilize and once Ukraine receives
the next tranches of official financing, the NBU may resume the gradual easing
of monetary policy.
At the same time, should the
aforementioned risks materialize, the NBU will be forced to keep a
restrained monetary policy in place for a longer period to meet its inflation
objectives.
I would like to stress once again
that the NBU is in the run-up to the adoption of an inflation-targeting regime.
Our inflation objective is to attain an end-year inflation target of 12%
consistent with our projections. This means that the NBU will do its utmost to
meet this objective.
I would like to dwell on FX
market volatility that has been recently observed in Ukraine.
The FX market is more or less
stable. The UAH/USD exchange rate currently stands at UAH 25 - 25.2 per
U.S. dollar. The NBU has not intervened in the interbank market for
the third day in a row. Market forces are at play to achieve an
equilibrium between the supply and demand, bringing the UAH/USD exchange
rate to UAH 24.80-25.20 per U.S. dollar. In other words, it is the
exchange rate at which foreign currency is traded on the interbank market, with
the NBU not stepping in with interventions.
We have repeatedly stated that
the market is under the influence of both temporary and fundamental factors.
First, some clarity should be brought
to the defilnition of temporary, or short-lived
factors. We have repeatedly stressed that the exchange rate
fluctuations of the hryvnia reflect mismatches between the supply and
demand for foreign currency.
As you know, 11 January 2016 was a public holiday
in Ukraine, whereas 16 and 18 January were business days in our country. Unlike
in Ukraine, these dates fell on public hoildays in the US. This
inconsistence caused temporary mismatches between the supply of and demand for
foreign currency in the interbank market.
What did the NBU do to address
these mismatches? The NBU intervened by selling foreign currency in the
interbank market. Overall, USD 118 million has been sold through 5 foreign
exchange interventions since the start of the year.
Why did we do it? We did it to
mitigate excessive exchange rate volatility.
I would like to stress once again
that these are short-lived factors, and should not be interpreted as more than
this.
What matters to us are the
fundamental factors.
I am referring here, to the
deteriorating external environment. Last year our current account was balanced.
Unfortunately, this year the current account is projected to slip into a
deficit of 3% of GDP.
Falling global commodity prices,
a cycle of interest rate rises launched by the US Federal Reserve, a ban on
Ukraine’s exports to the Russian Federation taken together will have
implications for the balance of payments performance, and consequently, the
exchange rate of the hryvnia.
Other fundamental factors include:
downside risks that may arise from depreciation of the currencies of Ukraine’s
trade partner countries. All the world's currencies tend to depreciate against
the U.S. dollar. Hardly any country has managed to avoid the
depreciation of its currency. The currencies of the countries exporting raw
materials, including CIS countries, are primarily subject to
currency depreciation.
You can see what is happening to the Russian
ruble, Kazakh tenge, and Azerbaijani manat, which, by the
way, is the world's worst-performing currency. These countries
are Ukraine’s trading partners, which makes our currency exposed to these
global developments.
At the same time, it should be
stressed that these risks can be partly offset by other factors, including:
· First, low energy prices.
· Second, the disbursement of official financing under
IMF's EFF program and related official financing under other programs,
Eurobonds issued with US guarantees, funds committed by the World Bank, the
EBRD and other international organizations.
Ukraine is shielded from external
risks under the “umbrella” of the financial assistance provided by
international institutions. We finalized all technical issues in Davos and
now look forward to signing the Memorandum with the IMF. Following
the signing of the Memorandum, the IMF's Executive Board will make the final
decision at its meeting.
Unlike Ukraine, our trading
partners from among CIS countries do not enjoy financial support from
international institutions. Yesterday the Republic of
Azerbaijan requested the IMF to begin a preliminary dialog with its authorities
on a possible Fund-supported economic program to stablize the
macroeconomic situation in the country. What is happening to the currencies of
Ukraine’s trade partner countries raises our concerns.
I would like to stress once again
that when we adopted a flexible exchange rate regime in 2014,
the NBU warned that the exchange rate would be subject to fluctuations as this
phenomenon is an integral part of the flexible exchange rate regime. The
exchange rate is determined by the ratio between the demand for foreign
currency and its supply, meaning that the market should be self-regulated by
market forces. This said, the NBU’s task is to mitigate excessive
exchange rate volatility and help the market find its equilibrium exchange rate
rather than fix the exchange rate.
Of course, households are more
concerned about the situation in the FX cash market than interbank market
developments. I would like to stress that the NBU can comment on the situation
in the overground (legitimate) FX cash market, which operates through
officially licensed bank foreign exchange offices.
The cash exchange rate is
normally slightly higher than that of the interbank market, which plays a
crucial role in determining the exchange rate. Apart from the fundamental
factors, the cash FX market is also subject to additional factors.
· The first, and most important, factor is household
sentiment.
· The second factor is seasonality. During the winter
holiday season, people tend to use their payment cards for shopping abroad and
making purchases in foreign currency. Banks closes their FX positions through
FX purchases in the cash market.
At the same time, as is the case at the turn
of the year, the demand for foreign currency is usually higher than its supply.
· The third factor is exceessive liquidity
linked to social payments.
As you know, in late 2015 UAH 40
billion, including UAH 14 billion in upfront pension payments for January was
paid out, which created the additional money supply in the cash
market.
Furthermore, VAT was refunded to
companies at the end of the year, providing the latter with exessive liquidity
to be used for FX purchases in theinterbank market.
The NBU pushes for such payments
(outcoming cash flows) to be pre-scheduled and planned in advance.
The NBU anticipated that such
payments would be paid out at the end of the year and took preventive measures.
Apart from foreign exchange interventions conducted to smooth excessive FX
market volatility, the NBU absorbed excessive liquidity from the banking
system. First, the NBU offered certificates of deposit to banks to park their
idle funds. At the end of the year, UAH 80 billion was
invested by commercial banks in NBU certificates of deposit. This move was part
of our monetary policy measures.
As regards to excessive liquidity
in the banking system, the NBU is engaged in steadfast efforts to address
it. At the end of 2015, we raised the required reserve ratio. Now banks are
required to keep up to UAH 40-41 billion in required reserves on the correspondent
accounts with the NBU (vs UAH 25-26 billion at the end of the
year).
Additionally, the NBU has ceased the practice of
including cash-in-vault in domestic currency in calculation of reserve
requirement ratio. The remaining funds have been invested by banks
in NBU certificates of deposit. The NBU also encourages banks to repay
refinancing loans. Last week alone, a total of UAH 1.5 billion in refinancing
loans was paid back by banks. Efforts are under way to ensure settlement of
outstanding debts. In late 2015, over UAH 4 billion was paid back by banks.
The situation in the banking
system is predictable and kept under control. The NBU is set to prevent
excessive exchange rate volatility, which is triggered by temporary mismatches
between the demand for foreign currency and its supply. However, the NBU will
never attempt to counteract the fundamental factors determining the exchange
rate where market forces are at play.
I would like to draw your
attention to the fact that our updated projections will be available in the
Inflation Report to be published on 4 February 2016. Our next meeting on
monetary policy issues will be held on 3 March 2016 as scheduled.
Thank you for your attention!
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