ADVERTISEMENT

Ukraine Defies Surge in Inflation by Keeping Rates on Hold

Ukraine Defies Surge in Inflation by Keeping Rates on Hold

Sign up for the New Economy Daily newsletter, follow us @economics and subscribe to our podcast.

Ukraine unexpectedly kept its benchmark borrowing rate unchanged, defying concerns over soaring inflation by arguing it sees the surge as temporary.

The central bank left its key policy rate at 7.5% on Thursday, holding fire after two consecutive hikes. That surprised most economists surveyed by Bloomberg who had predicted an increase to 8% after Ukraine saw its consumer price growth rise at Europe’s second-fastest rate behind Turkey.

“We made a pause in rate hikes, as this global price shock familiar to each nation on the planet now is transitional,” Deputy Governor Dmytro Sologub told a news conference. “On the other hand, Ukraine is one of the countries that has faced galloping inflation in its past, and that was the reason for us to start the cycle of rate hikes earlier than other countries.”

Ukraine Defies Surge in Inflation by Keeping Rates on Hold

While central banks in the European Union’s east are quibbling about whether the recent spike in consumer prices will persist and whether it requires action, the picture is far clearer just beyond the bloc’s borders.

Russia lifted benchmark borrowing costs to the highest in more than a year last week and signaled more monetary tightening to come. Ukraine, which saw annual price growth jump to 9.5% in May, has raised rates from a post-communist low twice since March.

Now at a two-year high, inflation has exceeded the expectations of both analysts and the National Bank of Ukraine.

“I find it surprising, as inflation has certainly gone beyond the NBU’s own forecasts,” Citibank AO Chief Economist Ivan Tchakarov said of the decision to keep rates on hold. “Moreover, the NBU had said that it may react if inflation surprises to the upside. Therefore, I take this decision as inconsistent with market guidance.”

Phasing Out

Governor Kyrylo Shevchenko said non-conventional measures had done their part to alleviate the impact of the pandemic-induced crisis. Instruments including long-term refinancing and interest-rate swaps would now be gradually retired, he said.

“The phasing out of these instruments will provide the NBU with more control over inflation processes,” he said.

Ukraine’s $5 billion IMF program, which has been frozen for months, remains a concern too. Cooperation with the Washington-based lender is key to maintaining financial stability.

There are factors that should help to counter the inflation surge, including an abundant harvest that could slow the advance of food costs and a stronger hryvnia. The currency is one of the world’s top performers against the dollar this year.

The central bank also said that it doesn’t see signs that underlying inflationary pressures will increase beyond its forecast.

©2021 Bloomberg L.P.