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 March 2020.
* * *
Dear colleagues,
Please be informed that the Board of the National Bank of Ukraine has decided to cut the key
policy rate to 10% per annum effective 13 March 2020.
The NBU continues its monetary policy easing, as predicted, in order to bring inflation back to its
target range of 5% +/- 1 pp and to support economic growth in Ukraine amid a cooling global
economy.
What inflation developments followed the last monetary policy meeting?
In the first months of the year, inflationary pressures waned faster than we had
expected. Consumer inflation slowed down to 3.2% yoy in January and to 2.4% yoy in February,
which was faster than foreseen in the forecast trajectory. As a result, inflation is currently below
the NBU's medium-term target of 5% that is the level optimal for the development of the Ukrainian
economy.
A number of factors stand behind the faster disinflation.
First, last year's strengthening of the hryvnia impacted prices of goods, especially those which
are imported.
Second, supply of some raw foods increased.
Third, global energy prices dropped.
These factors offset the effect of robust consumer demand, which was bolstered by the lasting
growth in real household income. Growth in real wages accelerated to 12.5% in January, and
growth rates of retail turnover continues to exceed 12%.
What are the future inflation developments?
In January the NBU forecast inflation at 4.8% as of the end of 2020, but this forecast may
be reviewed in April depending on further developments.
So far, the global spread of the novel coronavirus has had a limited or neutral impact on the
economy of Ukraine. Ukraine's exports continue to rise. Further increases in physical volumes of
exports have more than offset certain declines in prices for some of the goods the country
exports. At the same time, import prices (especially energy prices) are declining even faster than
export prices.
The price environment on the crude oil market has been favorable for Ukraine even disregarding
the latest developments. In February, crude oil prices declined by 10%-15% yoy on average,
European prices for natural gas fell by 50%, and metals prices dropped by 11%-12%. Prices for
grains and iron ore remained almost unchanged.
Uncertainty over the spread of the novel coronavirus, and stronger turbulence on financial and
commodity markets saw the Ukrainian FX market respond with deteriorated sentiment and
increased nervousness. This has led to a sizeable increase in demand for foreign currency,
which exceeded the supply, starting last week.
The NBU has been active on the interbank foreign exchange market since last week in order to
smooth out large fluctuations of the exchange rate. This week alone, net FX sales by the NBU
reached USD 700 million, and the central bank is ready to conduct more FX interventions if
necessary. Despite the fact that the psychological factor is the only reason for the FX market
turmoil, it poses a risk of a deterioration in inflation expectations, which can later affect consumer
prices.
Although so far the global spread of the novel coronavirus has had little effect on economic
growth and inflation in Ukraine, the NBU will most probably have to revise its
macroeconomic forecasts in April. After all, the following consequences of the spread of
the coronavirus have not yet impacted economic activity and inflation in Ukraine:
the downward pressure on prices and a cooling of the global economy
monetary policy easing by central banks of the leading economies and Ukraine's trading
partners in response to these processes
measures taken by governments to prevent the spread of COVID-19.
Apart from the drop in global prices caused by the coronavirus, disinflation in Ukraine will be
driven by the recent rise in competition between crude oil producers. This will keep energy prices
at record lows, which will also impact prices for Ukrainian exports.
Overall, the effect of all these factors on economic growth and inflation in Ukraine will be mixed,
adding to the uncertainty.
What other factors did the NBU consider when making its monetary policy decision
today?
The NBU Board continued to rely on the key assumption that cooperation with the IMF
will continue.
Signing a new agreement with the IMF will make the Ukrainian economy less vulnerable in a time
of turbulent global markets and during a period of heavy public debt repayments. Investors'
perception of Ukraine will also depend on Ukrainian court rulings on the responsibility and
liabilities to the state of the former owners of insolvent banks.
The risk arising from the global spread of the novel coronavirus could, if realized, drive the global
economy into a recession and cause a significant slowdown in the Ukrainian economy. A
dramatic decline in global demand and investors' revaluation of risks related to developing
economies could negatively affect Ukraine's external trade and make it more difficult for Ukraine
to obtain financing.
There are other significant risks. They include:
an escalation of the military conflict in eastern Ukraine and new trade restrictions being
introduced by Russia
a drop in the harvest of grain, fruit and vegetable crops in Ukraine in the wake of unfavorable
weather
the higher volatility of global food prices, driven by global climate change.
Therefore, the NBU Board made its key policy rate decision when inflationary pressures were
decreasing faster than expected, and the economy needed further support.
In view of the above, the NBU Board continued its monetary policy easing cycle by cutting the key
policy rate by 1 pp, to 10%, as envisaged by the central bank's January forecast. What matters to
the NBU the most is that the cut will provide the necessary impetus to the economy, while also
not preventing the central bank from achieving its inflation target, which is its priority.
What will the NBU's monetary policy stance be in future?
As before, the NBU plans to decrease its key policy rate to 7% by the end of the current
year.
In deciding on the pace of key policy rate cuts to that level, the NBU will closely monitor:
the spread of the coronavirus around the world and in Ukraine, and its impact on the
domestic and global economy
the response of governments and central banks to these developments
any progress achieved in negotiating a new aid agreement with the IMF, which will shape the
expectations of financial market participants, and determine the prices of Ukrainian assets.
If there are favorable developments, and if the new Ukrainian government speeds up reform, the
NBU will be able to ease its monetary policy more quickly.
Conversely, if the above risks materialize, the NBU will respond quickly by deploying the
monetary policy tools it has at its disposal.
Thank you for your attention!