Ukraine Leaning Toward Delaying Rate Cuts on Energy-Price Surge
Ukraine is edging toward postponing plans to cut interest rates as rocketing natural gas prices drive inflation -- already Europe’s fastest behind Turkey.
Speaking this week in an interview, central bank Deputy Governor Serhiy Nikolaychuk said there’s a more than 50% chance of a decision at the next monetary-policy meeting on Oct. 21.
“We’ll review the trajectory of the key rate, which now envisages the first cut in the second quarter of next year,” he said, calling gas prices “a significant inflation shock.”
“Our first line of defense is to delay the planned rate cut,” Nikolaychuk said in his office in the capital, Kyiv. “My personal view at the moment is that we’ll need to keep the rate unchanged at 8.5% for longer than we envisaged before.”
The eastern European country has been among the continent’s most aggressive in tightening monetary policy to counter a double-digit advance in consumer prices, increasing its benchmark four times this year.
Guidance reaffirmed this month envisages holding rates where they are before gradually lowering them from April. But record-breaking European gas prices, caused by reduced supplies from abroad and depleted stockpiles, may delay the prospect of looser policy to buoy the pandemic-hit economy.
Indeed, lockdowns actually pushed Ukraine back into recession in the first half of the year -- marking a challenge for the central bank as it simultaneously grappled with surging consumer prices.
While elevated inflation may persist for longer, the outlook for the final months of 2021 has improved as the rate hikes to date help bolster the hryvnia. The currency has gained 6.6% this year -- the region’s best performance.
“We see inflation peaking at a lower level than we estimated,” said 40-year-old Nikolaychuk, who joined the central bank in the summer from a local investment firm and who previously helped facilitate Ukraine’s switch to inflation-targeting following the country’s 2014 revolution.
He sees price growth possibly reaching 10.5% before dipping to 9.6% or below by year-end.
Another positive for Nikolaychuk is talks with the International Monetary Fund to restart a $5 billion aid loan that’s been frozen for more than a year because the government failed to meet its terms.
On the chance of reaching a staff-level agreement, he said he’s “quite positive -- much more optimistic than two to three months ago.”
An IMF mission is currently assessing Ukraine’s progress. Two remaining laws on central-bank independence and the anti-corruption bureau should be passed soon, according to Nikolaychuk.
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