Consumer inflation breaks 8% ceiling, further prime rate increase looks inevitable

UKRAINE - In Brief 10 Apr 2021 by Dmytro Boyarchuk
Our CPI estimate for 2021 was one of the most pessimistic among forecasting agencies. Still the reality appeared to be even more relentless. In March CPI sped up to 1.7% m/m (we projected 1.2% m/m) and touched 8.5% year-on-year. For 3m 2021 consumer inflation reached +4.1% ytd. Soaring food prices are the main driver for extraordinary consumer inflation speed up. Food prices grew by 2.1% m/m and added 0.91 ppt to CPI increase through the month. Prices for clothing and footwear increased by 12.7% m/m and added 0.66 ppt. Transportation prices also strengthened to +1.8% m/m and added 0.19 ppt to CPI in March. Prices for clothing and footwear and transportation prices were in line with our prediction while food prices grew twice faster than we estimated. In light of faster inflation in February and March our initial CPI forecast (+6.7% ytd or +7.3% in 2021) looks already invalid. Even if we are lucky to see food inflation slowing in 2H 2021, CPI will be near 8% y/y or even higher. Provisionally, we revise our CPI estimate up to +7.6% ytd or +8.1% y/y for 2021. We will present more details on that at our quarterly forecast report we are currently drafting. Prime rate increase looks as an inevitable consequence of further inflation speed up. Prime rate should go up to 8%, we believe. But the NBU Board might make less radical move (up to 7%) amid cheap loans aspirations of the NBU Governor. The Board meeting will be next week on April 15th.

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