Prime rate goes up to 7.5%, the NBU signals preference to keep this level till 2022

UKRAINE - In Brief 15 Apr 2021 by Dmytro Boyarchuk

---

As expected, the NBU Board increased the prime rate by 1.0 ppt up to 7.5% amid a substantial inflation speed up to 8.5% y/y in March. The NBU revised its inflation forecast up to 8% for 2021 from 7%, estimated previously. Also the Bank worsened GDP forecast down to +3.8% from +4.2%, estimated previously. Monetary authorities anticipate consumer inflation to peak through Q3 2021 and to calm down by the year-end. The NBU stated explicitly that “baseline forecast envisages that the key policy rate will remain unchanged, at 7.5%, until the end of 2021” thus signaling that it would prefer to abstain from further rate increases. Still the NBU declares its readiness “to continue raising its key policy rate to a level that will bring inflation back to its 5% target in H1 2022.” We read those lines as an indication that the prime rate most likely will be left unchanged at the next meeting of the Board (on June 17, 2021), whatever happens with inflation. It looks like the NBU plans to abstain from any actions through the summer months just observing the developments. Only extraordinary inflation dynamics might push the NBU Board for a next move, but, probably, only from September, we believe. An earlier rate review might happen if grain crops 2021 are much worse than expected, which will be an indication for an inevitable further inflation speed up.