The Central bank raises prime rate by 1 ppt up to 13.5%

UKRAINE - In Brief 26 Oct 2017 by Dmytro Boyarchuk
The Central bank raised prime rate by 1 ppt up to 13.5% today. The last time prime rate was increased in March 2015. Fast CPI (+10.2% ytd for September), growing inflation expectations, risks related to increased pensions and mounting appreciation pressure made the Board of the Central bank tightening monetary policy. Further prime rate increase is possible if inflation keeps soaring. The Central bank also revised its inflation forecast up to 12.2% ytd for 2017 from 9.1% ytd, estimated previously. Virtually, increased prime rate was a surprise for many observers. Inflation was strengthening but it was mainly driven by poor weather conditions (food prices). Against this backdrop business actors did not see how prime rate increase could curb food inflation. However, the Board of the Central bank decided that some reaction is needed when inflation target was missed. What’s more, there is still an issue of huge overhang of hryvnia at the Treasury account (UAH 61.2 billion or 2.2% of GDP as of September 1) which also, probably, pushed the Central bank to send signal about monetary tightening. What should we expect next? Food inflation will dominate at least for the next half a year despite any Central bank efforts. This inflation spiral will calm down only close to the next spring. However, the Central bank verylikely might undertake another prime rate rise amid increased pensions and expected massive budget outlays in December. We still expect the Central bank to return to prime rate cuts provisionally from April-May 2018 when inflation starts easing.

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