OREANDA-NEWS. The Board of the National Bank of Ukraine has decided to cut the key policy rate to 15.5 %, effective from 29 July 2016.   Further alleviation of risks to price stability enabled the NBU to  ease monetary policy, which  is consistent with  the need to achieve the NBU’s inflation objectives  set at 12% +/-3% for 2016 and 8% +/-2% for 2017.

In June 2016, headline inflation slowed to 6.9% yoy. Actual inflation decelerated at a faster-than-projected pace. 

Low aggregate demand, a gradual appreciation of the hryvnia exchange rate and a high supply of food products have contributed to the slowdown in inflation.

Real wages resumed growth in annual terms. However, as before,  consumer demand did not exert additional pressure on inflation.

The slowdown of actual inflation, along with the exchange rate appreciation, contributed to improvements in inflation expectations of households, businesses and the expert community.

As previously projected, the medium-term inflation objectives remain unchanged at 12% by the end of 2016 and 8% by the end of 2017.  

In H2 2016, annual headline inflation is expected to get close to the target, mainly due to the reflection of the upward adjustments in utility tariffs in statistics.

At the same time, inflation in respect of other consumer basket components (core inflation and raw food prices) is expected to slow at a faster pace. The faster-than-expected deceleration can be attributed to the slowdown in imported inflation in the wake of low exchange rate volatility and improved inflation expectations.

The NBU has also maintained its annual real GDP growth forecast  unchanged at 1.1% by the end of 2016 and 3.0% by the end of 2017. However, we revised the current account deficit forecast downwards from USD 2.3 billion to USD 1.8 billion. The downward revision reflected lower natural gas imports, improvements in the terms of trade, projected high yield of crops and larger private remittances from abroad.

Should the baseline forecast scenario materialize and risks to price stability abate further, the NBU move ahead with the monetary easing. This move will promote the reduction of borrowing costs and boost economic growth.

The decision to cut the key policy rate to 15.5% is approved by NBU Board Decision No. 172-рш, dated 28 July 2016, On Key Policy Rate.

A detailed macroeconomic forecast will be published in the Inflation Report on 4 August 2016.

The next meeting of the NBU Board on monetary policy issues will be held as scheduled on 15 September 2016.