Yakiv Smolii: National Bank of Ukraine press briefing - monetary
policy statement
Speech by Mr Yakiv Smolii, Governor of the National Bank of Ukraine, at a press briefing on
monetary policy, Kyiv, 12 December 2019.
* * *
Dear colleagues,
Please be informed that the Board of the National Bank of Ukraine has decided to cut the key
policy rate to 13.5% per annum effective 13 December 2019.
The NBU speeds up the monetary policy easing, as the rapid appreciation of the hryvnia makes
inflationary pressures decline faster than expected.
What inflation developments followed the last monetary policy meeting?
In November, consumer inflation slowed to 5.1% yoy, exceeding our expectations. In
such a way, the NBU attained the medium-term target of 5%, which was set in 2015.
The steady disinflation has been driven by a gradual easing of underlying pressures on prices,
reflected in a slowdown of core inflation, and by lower energy prices. Inflation slowed markedly
due to both the strengthening of the hryvnia and an improvement in inflation expectations. The
above factors neutralized the pressure on prices from robust consumer demand and worse
harvest of some vegetables.
I would like to emphasize the reasons for the hryvnia appreciation, which has given rise to much
speculation. In October-November, the excess supply of foreign currency was mainly driven by
proceeds from Ukrainian exports, in particular thanks to a record harvest of grain and oil crops,
and selling foreign currency coming from borrowings of state-owned companies.
In particular, agriculture and metals industry provided 70% of foreign currency supply on the
interbank market in November. Contrary to the common belief, the continued foreign investment
in hryvnia government bonds did not have a major impact on the foreign exchange market, unlike
in the past months.
At the same time, the NBU actively purchased excess foreign currency to increase international
reserves. Net foreign exchange interventions have totaled more than USD 5.5 billion since the
start of 2019.
(Corrected) Besides, our purchases of foreign currency much exceed the inflows from
nonresidents. The nonresident portfolio grew by around USD 4 billion this year. Thus, net
purchases exceeded this amount by more than one and a half billion dollars. This indicates that
these are not only nonresidents who create the excess supply of foreign currency.
What are the future inflation developments?
The stronger hryvnia made inflation decline towards the 5% target faster than envisaged in the
latest macroeconomic forecast. For that reason, in January, we will revise and publish the new
macroeconomic forecast, including the future inflation trajectory.
There is a cause for optimism. Reaching the staff-level agreement on the new cooperation
program with the International Monetary Fund is an important milestone in the progress of
structural reforms in Ukraine as well as in maintaining macrofinancial stability and steady
economic growth.
At the same time, other risks that the NBU took into consideration when making its
previous monetary policy decision remain in place.
In particular, the risk of rising threats to macrofinancial stability persists because of court rulings
and pressure on the NBU. If materialized, these risks could worsen exchange rate and inflation
expectations, and make it harder for Ukraine to access the international capital markets at a time
when debt repayments are peaking.
The following external risks remain relevant:
a complete halt of the transit of Russian gas through Ukraine
intensified trade tensions and more turbulent global financial markets
an escalation of the military conflict and new trade restrictions introduced by Russia.
Therefore, macroeconomic conditions that are more conducive to lower inflation,
continued cooperation with the IMF, and the practically unchanged balance of risks have
enabled the NBU to ease monetary policy more quickly.
The NBU believes that more active cuts in the key policy rate will not prevent it from maintaining
inflation close to its 5% target, while at the same time promoting economic growth.
Favorable macroeconomic conditions have given the NBU the green light to take a number of
other steps together with key policy rate cuts.
First, the NBU intends to purchase more foreign currency to replenish international
reserves.
With that in mind, the central bank will increase the amount of its planned interventions in the
interbank market to purchase foreign currency from USD 30 to USD 50 million per day for the
remainder of the current year and Q1 2020.
Second, the NBU has changed its approach to reserve requirements for banks.
From March 2020, the NBU will introduce differing reserve ratios for different currencies. For
hryvnia reserves, this ratio will be decreased to zero. For FX reserves, this ratio will be raised to
10%. The NBU believes that this will not only contribute to the lower dollarization of deposits but
will also helpdecrease loan rates for households and businesses more quickly.
Third, the NBU continues to liberalize the FX market.
The e-limit on households' investment abroad will be increased by two times - to EUR 100,000
per year.
The Board approved all of the three decisions today at the monetary policy meeting. More
information about these decisions will be made public today on the central bank's website.
What will the NBU's monetary policy stance be in future?
The macroeconomic forecast that the NBU published in October envisages that the key
policy rate will be cut further, to 8%.
A revised macroeconomic forecast will be made public in January 2020. Among other things, the
forecast will take into account the impact of consumer demand and FX market conditions on
future inflation.
In addition, the NBU will continue to monitor what progress is achieved in implementing key
domestic reforms. These reforms are those that are envisaged in the memorandum of
understanding signed by the Ukrainian government and the NBU, and the judicial reform required
to establish the rule of law in Ukraine.
The next meeting of the NBU Board on monetary policy issues will be held on 30 January 2020.
Thank you for your attention!