18:20 07.08.2020

ICU invites NBU council to consider reduction of medium-term inflation target of central bank

2 min read
ICU invites NBU council to consider reduction of medium-term inflation target of central bank

The Council of the National Bank of Ukraine (NBU) should think about lowering the medium-term inflation target of the central bank, which currently stands at 5%, Head of macroeconomic research department of Investment Group ICU Serhiy Nikolaychuk has said.

"The NBU Council should already think about reducing the optimal inflation rate in Ukraine and the corresponding inflation target. After all, the lower inflation rate will contribute to achieving the president's goal – to lower interest rates on loans, including mortgage loans, below 10%," he wrote on his Facebook page on Friday.

Nikolaychuk reminded that the NBU Council in July 2018 approved a medium-term inflation target of 5% and declared that it "may be revised only downward provided that the volatility of the hryvnia exchange rate and changes in relative prices are reduced and the convergence effects of the Ukrainian economy to the level of the countries - major trading partners are weakened".

He added that the NBU Council approved a medium-term goal at this level for the first time in August 2015.

"At that time, five years ago, when inflation exceeded 50%, it looked like a very ambitious goal. But as we can see, this goal was met by the National Bank last year and even a little over-fulfilled in the first half of the current year," Nikolaychuk stated.

According to Nikolaychuk, the inflation target of 5% is one of the highest in the world – among 39 countries with inflation targeting regime (as well as the Ukrainian Central Bank) the target is higher only in Ghana (8%).

He added that the factors that were taken into consideration by the NBU Council in 2015 when setting the inflation target remain significant, but their capacity has significantly weakened in five years.

"Macroeconomic volatility since the introduction of inflation targeting has significantly decreased as compared to previous years," Nikolaychuk said.

According to him, the partial management of inflation by the National Bank has also been facilitated after the completion of the main stage of bringing administratively regulated prices to the market level, which was one of the weighty factors that laid in the trajectory of inflation targets reduction in 2015.

He added that another factor for revising the goal is the significant strengthening (by 23%) of the real effective exchange rate of the hryvnia over the past five years.

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