NBU surprised with a minor prime rate cut by 0.5 ppt down to 14.5%

UKRAINE - In Brief 14 Mar 2024 by Dmytro Boyarchuk

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The NBU Board reduced the prime rate by 0.5 ppt to 14.5%, effective March 15. This decision came as a surprise to the market, especially following the January announcement that a minor prime rate cut might only be considered in the second half of 2024. The main justification for this unexpected move appears to be the continued disinflation observed in the first two months of the year (+0.3% m/m or +4.3% y/y in February), with the CPI trajectory falling below projections. Improved expectations regarding foreign support (from the EU, the US, and other countries) also played a role in the NBU's decision to proceed with monetary easing despite the turbulent winter months. While this rate cut is largely symbolic and unlikely to significantly boost the economy's crediting, the NBU has faced considerable criticism for maintaining double-digit rates when inflation has been in single digits since August 2023 and has dropped below 5% in the last two months. Thus, the NBU opted to make a modest adjustment, signaling its acknowledgment of the strong disinflationary trend. However, the potential for further rate cuts remains very limited, and inflation is expected to accelerate over the year.