The Central bank keeps prime rate unchanged at 12.5%

UKRAINE - In Brief 14 Sep 2017 by Dmytro Boyarchuk

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Today the Central bank left prime rate at 12.5%. Mounting inflationary risks stand behind this decision. In August State Statistics reported deflation (CPI dropped 0.1% m/m); however, the price decline was very modest, much less than the Central bank anticipated. As a result, for 8m 2017 CPI increased 8.1% ytd, mainly reflecting food inflation (+11.5% ytd). Traditionally inflation speeds up from September meaning that a 9.1% ytd inflation target for 2017, the Central bank outlined, is likely to be missed. To make matters worse, there is a sold overhang of hryvnia liquidity at the Treasury account (UAH 61.2 billion or 2.2% of GDP as of September 1) which threatens hryvnia stability and promises stronger inflation tendency over the upcoming months. Against this backdrop the Central bank started talking about potential monetary tightening and possible prime rate increase. In fact, now a lot depends on Finance Ministry plan to manage spending smoothly. Good news that Finance Ministry perfectly understands the risk and probably will do its best to prevent jump in spending (unlike last year). Bad news is that half of cash accumulations are in local budgets and they are beyond control of the central bodies. In any case, the recent trends removed monetary easing from agenda at least till the end of the year.