14:01 25.03.2019

Quarter of members of NBU monetary policy committee propose cutting key policy rate in March – NBU

3 min read
Quarter of members of NBU monetary policy committee propose cutting key policy rate in March – NBU

Two members of the monetary policy committee (MPC) of the National Bank of Ukraine (NBU) at a meeting on March 13 proposed to cut the key policy rate in March, the NBU has reported on its website.

So, one of them suggested reducing the refinancing rate by 0.5 percentage points (p.p.), to 17.5%, believing that the NBU needs to show the beginning of a movement towards mitigation, which will give the necessary positive signal for the banking system and the economy.

Another member of the committee spoke in favor of reducing the refinancing rate by 1 p.p., as he believes that the transition to mitigation should have been started even earlier, therefore a more significant reduction in the refinancing rate is necessary to maintain economic growth.

Arguing their position, they also said that actual and projected economic indicators suggest that a scenario that benefits Ukraine is materializing and that the underlying inflationary pressure is on the decline, and the support Ukraine had received from its official creditors improved inflation expectations. According to them, the decline in inflation will be supported by a prudent fiscal policy that will take into account sizable repayments on public debt, and favorable FX market conditions and the strengthening of the hryvnia will facilitate a further decline in inflation. In addition, comments by the world’s leading central banks signal a willingness to ease monetary policy by more than previously anticipated. This mitigates external risks to emerging markets and allows for easing the monetary stance without triggering a capital flight, they said.

At the same time, six members of the committee, who spoke for the need to maintain the refinancing rate unchanged at 18%, said that for inflationary pressure to continue to decrease from the still high level, a sufficiently tight monetary stance is necessary, and ramping up social spending amid the political uncertainty that surrounds this year’s presidential and parliamentary elections could worsen inflation expectations. In addition, they estimate that as the election cycle peaks, the banks may be less inclined to revise their interest rate policies, biding their time to see how events play out. This will interfere with the effective operation of the monetary transmission mechanism and wipe out the impact of the key policy rate cut on market interest rates.

They also said that the recent easing of monetary policy by the ECB occurred as projections of economic activity and inflation in the euro area deteriorated significantly, triggering a rather negative response from financial markets and dampening investor interest in emerging markets. This may affect the conditions in Ukraine's FX market. It would be too early to ease monetary policy now, but this option should be revisited in future meetings, six MPC members said after considering the arguments noted above.

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