Ukraine: NBU initiates monetary policy easing earlier than expected
At its 27 July meeting, the National Bank of Ukraine (NBU) cut its key policy rate by 300 basis points to 22.00%. Concurrently, the NBU lowered rates on overnight certificates of deposit by 200 basis points to 18.00% and the refinancing rate by 300 basis points to 24.00%. The move marked the start of the Bank’s monetary easing cycle after maintain the rate at its June 2022 level for eight consecutive meetings.
Faster-than-expected disinflation and stable FX market conditions allowed the Bank to start cutting rates before its previous target of Q4 2023: In June, inflation returned to pre-war levels, while international reserves reached a record high. These developments, coupled with previous monetary policy moves, stabilized domestic price and currency dynamics, enabling the policy easing cycle. Additionally, the NBU reduced rates to support the war-torn economy.
In its forward guidance, the NBU stated it would cut rates gradually to simultaneously support both the disinflationary trend and the hryvnia peg to the USD. It further stated that the monetary policy easing cycle would continue “provided the FX market remains stable and inflation declines over the forecast horizon”. Additionally, the Bank scrapped its previous policy rate forecast, stating that future moves would depend on the evolution of the war and foreign aid, inflationary trends and developments in FX markets. With regard to the country’s exchange rate regime, the Bank commented that it would aim to maintain the attractiveness of hryvnia assets and strengthen confidence in the currency but did not name a concrete date for loosening the regime.
Our panel anticipates approximately 300 basis points of further interest rate cuts by end-2023. That said, the evolution and intensity of the war, foreign aid inflows and the strength of the domestic economy remain key factors to monitor.
The next meeting is scheduled for 14 September.