OREANDA-NEWS. 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 ease monetary policy further, 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 due to the reflection of upward adjustments in statistics for utility tariffs.   In the absence of significant unforeseen events, the NBU is on course to meet the end-year 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 target in Q4 2016. 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 expected earlier: 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.

The next meeting of the NBU Board on monetary policy issues will be held as scheduled on 8 December 2016.