The NBU slashes prime rate down to 8%, anticipates better CAD amid COVID-19 crisis

UKRAINE - In Brief 23 Apr 2020 by Dmytro Boyarchuk
The NBU Board slashed prime rate by 200 basis points down to 8% today. Low inflation (+2.3% y/y in March), no dramatic impact of COVID-19 crisis on external accounts so far, stabilized hryvnia and falling prices for hydrocarbons are behind this decision. That strong a cut was not expected, to be honest. Steadily strengthening hryvnia after March panic attack and limited CPI increase created a relaxed background. But stronger prime rate cut in the face of approaching problems with external demand – is really a brave move. The NBU explained it boldness with quite rosy view on economic prospects of Ukraine. Yes, GDP is expected to fall by 5%. But the NBU projects positive impact of COVID-19 crisis on external accounts with CAD narrowing to 1.7% of GDP compared to 3.2% of GDP projected previously. The NBU anticipates imports to fall much stronger than exports amid energy prices’ plunge and expects that saved foreign currency on vacations this summer will offset losses from remittances. All that means the NBU does not expect currency shock for Ukraine and believes COVID-19 crisis will not translate into dramatic slump of demand for Ukraine’s exports. Keep fingers crossed for the NBU’s optimism. However, in our opinion, this view is overconfident amid dominating uncertainty over further crisis trajectory. We believe the main hit for Ukraine is still ahead and the strength of potential impact is poorly predictable. Nevertheless, it looks the NBU is determined to ease monetary policy till the day everything turns dramatic. Next meeting of the Board will be on June 11.

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