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, 5 September 2019.
* * *
Dear colleagues,
The Board of the National Bank of Ukraine has decided to cut the key policy rate to
16.5% per annum, effective 6 September 2019.
The NBU is continuing the cycle of monetary policy easing, as it expects inflation to decline to the
target of 5%.
What inflation developments followed the last monetary policy meeting?
Despite seasonal decrease of prices in July, inflation in annual terms was higher than
our forecast and made 9.1% The NBUestimates inflation to have declined in August, although
still remaining above the forecast level. The deviation was mostly driven by temporary factors
related to food supply, in particular the supply of vegetables.
Meanwhile, core inflation was 7.4% was in line with the NBU's forecast. The tight monetary policy
continued to hold back the underlying pressures on prices, in particular through the exchange
rate channel. The appreciation of the hryvnia had the strongest impact on prices of fuel and
some food products. However, disinflation was restrained by the greater consumer demand and
the rise in real wages by almost 10% over the year.
What are the future inflation developments?
The NBU reiterates its forecast that inflation will meet the 5% medium-term target at the
end of next year. Macroeconomic factors in place since the previous monetary policy meeting
of the NBU Board have not changed the balance of risks to the forecast.
On the one hand, according to the NBU's estimates, a strengthening in the exchange
rate will help curb inflation in the next few months.
The hryvnia appreciation was driven by fundamental market factors, such as:
favorable global commodity prices
good harvest of grain crops
continued growth in IT services exports
a stronger investor confidence in the Ukrainian economy
the simplified access to the domestic government securities market for investors.
That reduced the amount of repatriated dividends and spurred demand for domestic government
bonds. Although the impact of foreign capital inflows on the domestic government bond market
weakened substantially over past weeks, the foreign exchange market has remained in balance.
The current drop in global oil and gas prices will be translated to domestic prices, with a certain
time lag.
On the other hand, the rapidly rising domestic demand and strong wage growth will push
prices upward. The more rapid GDP growth seen in Q2 2019 (to 4.6% yoy) was mainly driven
by a pick-up in domestic consumption amid a faster improvement in consumer sentiment. The
preliminary estimates of July economic activity showed that sustained domestic demand had
persisted.
Internal political risks to reducing inflation to its target decreased after the new
This
convocation parliament started to operate and a new government was formed.
makes it possible to intensify negotiations on a new cooperation program with the International
Monetary Fund. At the same time, there are still threats to financial stability arising from current
court proceedings related to the decisions taken by the state to improve the health of the banking
sector.
External risks are also important. These include:
a suspension of Russian gas transit through Ukraine starting in 2020
increased trade tensions and more turbulent global financial markets
an escalation of the military conflict and new trade restrictions introduced by Russia.
What is the NBU's current view of the future monetary policy stance?
The NBU will continue the cycle of monetary policy easing, provided inflation is steadily
declining to its 5% target. How quickly the key policy rate is reduced to its neutral level of 8%
will depend on both internal and external risks.
If structural reforms speed up, the NBU could cut the key policy rate more quickly. Another
important condition is inflation decreasing steadily to its target.
Conversely, if inflation risks materialize, in particular through persistent demand pressure, the
easing of monetary policy will be more gradual.
A summary of the discussion by Monetary Policy Committee members that preceded this
decision will be published on 16 September 2019.
The next meeting of the NBU Board on monetary policy issues will be held on 24 October 2019.
Thank you for listening!