National Bank of Ukraine cuts key policy rate from 8% to 6%

National Bank of Ukraine cuts key policy rate from 8% to 6%

The Board of the National Bank of Ukraine (NBU) has decided to cut the key policy rate from 8% to 6% effective

"Consumer and investment demand is most likely to remain subdued for longer than forecast in April. On the one hand, this will keep inflation below the target level [the target range of 5% ± 1 pp ] for longer than projected in the April forecast. On the other hand, this means that the Ukrainian economy will face a deeper contraction than expected," the NBU said.

The regulator said that further on, inflation will grow moderately, albeit likely heading towards the target range more slowly than expected.

According to the press release, the fiscal and monetary policy measures taken with the aim of supporting businesses and households will only partially offset the decline in consumer demand. The recovery of consumer demand will be gradual even after the quarantine is lifted.

The central bank also said that the FX market, which has a major impact on the price of the basket of goods, is favorable for low inflation.

The NBU said that since the start of April, the supply of foreign currency on the interbank market has exceeded demand. Imports of goods remain below pre-crisis levels across almost all categories of goods, while exports are declining more slowly. As a result, the hryvnia strengthened and since early April the NBU has used this opportunity to purchase around $1.8 billion in order to increase international reserves. In such a way, the NBU has become a net buyer of foreign currency since the start of the year, having compensated for the outflow of foreign currency from international reserves in March due to high demand for foreign currency.

The regulator said that inflation expectations are improving among households and financial analysts. According to the NBU, their current expectations of inflation in 12 months have aligned with the NBU's medium-term target.

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