NBU predictably cuts prime rate by 1 ppt to 15%, future uncertain

UKRAINE - In Brief 14 Dec 2023 by Dmytro Boyarchuk

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This time, the decision of the monetary authorities aligned with expectations. On December 14th, the NBU Board predictably reduced the prime rate by 1 ppt to 15%. Following this, the "working" rates were also cut by 1 ppt: the rate for overnight deposit certificates was lowered to 15%, three-month deposit certificates to 19%, and the refinancing rate to 21%. Rapid disinflation (+0.5% m/m or +5.1% y/y in November), coupled with the preserved stability in the FX market following the shift from a fixed to a controlled volatility FX regime, have been cited as reasons for the latest easing cycle step. As we discussed, the NBU closely monitored the controlled volatility regime's developments and, seeing no dramatic changes, decided to implement another rate cut. The rapid inflation slowdown was also a significant factor, but in the current context, it was of secondary importance compared to the FX market. Future developments remain uncertain as external financing for 2024 is still unsecured, even with only two weeks left until the end of 2023. The plan for a controlled adjustment of the hryvnia exchange rate, which aims to keep hryvnia deposits attractive compared to foreign currency assets, largely depends on the availability of foreign funds. Furthermore, the NBU itself expects a significant acceleration in inflation in 2024, up to 9.8%, driven by the hryvnia adjustment and an increase in utility tariffs. Given this context, the NBU might consider pausing further cuts to the prime rate. However, the decision regarding financing from the US will be a crucial factor in determining future actions, including the direction of monetary policy in 2024.