The NBU raises prime rate on IMF program concerns

UKRAINE - In Brief 13 Jul 2018 by Dmytro Boyarchuk

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In May we anticipated the IMF issue will be resolved by mid-July. However, the deal is still delayed and we think this point was the main reason why the NBU Board increased prime rate by 0.5ppt up to 17.5% on July 12th. At the press-release the NBU, as usually, talks about mounting inflation risks; however, this concern looks strange against the backdrop of sharply slowing consumers’ inflation (+4.4% ytd in 1H 2018 vs. +7.9% ytd a year ago). The decision of the NBU Board was delivered before the amendment on HACC was known and, probably, this timing gap played some role in tightening approach. However, potential approval of the amendment on HACC was discussed in media and the Board members should have considered this potential move in their decision. Still we see the prime rate increase amid steady disinflation trend. Probably, potential completion of HACC requirement did not encourage the NBU Board. Next prime rate review will be on September 6. What should we expect in September? Very unlikely the IMF issue will be completed by the time given that summers vacations start shortly. We anticipate further inflation slowdown what should build grounds for better mood for the NBU Board members. However, their worries about the IMF story again might spoil the party.