The Board of the
National Bank of Ukraine has decided to cut the key policy rate to 14%, effective
from 28 October 2016. Further alleviation of risks to price stability has given
the National Bank of Ukraine some room to further ease monetary policy, which
was consistent with the need to achieve its inflation targets in 2017-2018.
In September 2016, annual inflation stood at 7.9% and was fully in line
with the NBU’s forecast. The acceleration of headline inflation was mainly
attributed to upward adjustments in administered prices.
At the same time, inflationary pressures, driven by fundamental factors,
continued to ease, further contributing to the slowdown in core inflation to
6.3% y-o-y.
The deceleration in core inflation was underpinned by moderate
consumer demand, high supply of food products due to abundant crops, and
prudent monetary policy.
In October, FX supply exceeded demand in the FX market, enabling the NBU to
purchase foreign currency to replenish international reserves without
counteracting the appreciation trend.
The NBU has kept its headline inflation targets for
2016-2018 unchanged.
In Q4 2016, inflation is expected to return to the target level as a
result of the reflection of upward adjustments in statistics for utility
tariffs. At the same time, in the absence of significant unforeseen events, the
NBU is on course to meet the year-end inflation target for 2016 (12% +/-3%).
Annual inflation is expected to follow an erratic path throughout
2017. In Q1-Q3 2017, inflation might exceed 12%, reflecting a statistical base
effect and a high contribution from administered prices. As these effects wane,
annual inflation is expected to return to the NBU target level in Q4
2017. At the same time, core inflation is expected to remain stable
at 5-6%.
Therefore, the inflation targets for 2017 and 2018 (8% +/-2% and 6% +/-2 %,
respectively) remain within reach and will be supported by the appropriate
monetary policy.
In 2016, the economic growth forecast remained
unchanged at 1.1%. In the medium-term, GDP is expected to grow at a
more moderate pace than earlier expected: 2.5% in 2017 and 3.5% in
2018. The weaker GDP growth forecast reflects the revision of assumptions
related to a worsened external environment for Ukrainian exporters.
A pick-up in investment activity is expected to be the key driver
of economic growth. Lower risks of the escalation of military conflict
stimulate economic agents’ appetite to make investment and long-term consumer
decisions. However, this will lead to an increase in investment imports,
including machinery and equipment. As a result, net exports are expected to
make a negative contribution to GDP. However, going forward, a recovery in
investment demand will help boost export potential.
At the same time, on the forecast horizon, higher investment activity is a
key factor behind the upward revision in the current account deficit forecast
at USD 2.5 billion in 2016, USD 2.9 billion in 2017 and USD 2.8
billion in 2018. In 2017-2018, the overall balance of payments is
expected show a surplus supported by financial account net inflows,
including FDI inflows.
These inflows, combined with expected disbursements of future IMF loan
tranches, will increase international reserves up to USD 17.5 billion by
the end of 2016, USD 23.1 billion by the end of 2017, and USD 27.8 billion by
the end of 2018.
Further progress in advancing economic reforms under the IMF-supported
program is critical for bringing inflation down to the target level and
supporting economic recovery.
Should the baseline forecast scenario materialize and,
accordingly, risks to price stability abate further, the NBU will continue to
move ahead with monetary easing. This would help bring down
borrowing costs and underpin economic growth.
The decision to cut the key policy rate to 14% is approved by NBU Board
Decision No. 372-RSh, dated 27 October 2016, On The Key
Policy Rate.
A detailed macroeconomic forecast will be published in the
Inflation Report on 3 November 2016.
The next meeting of the NBU Board on monetary policy
issues will be held as scheduled on 8 December 2016.
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