The National Bank of Ukraine (NBU) will cut its key policy rate by lopping off a whole percentage point and bring the rate to 15.5% per annum on October 25 from the current level of 16.5%, the regulator said in a statement on October 24.
The NBU continues the cycle of monetary policy easing as inflation is firmly declining towards the target of 5%. In September, consumer inflation declined to 7.5% year-on-year, below the forecast published in the NBU's July inflation report. "Inflation continued to slow in October according to the NBU’s preliminary estimates," the regulator said in the statement.
The steady disinflation has been driven by a gradual easing of underlying pressures on prices, reflected in a rapid slowdown of core inflation.
"The tight monetary policy was one of the reasons behind the strengthening of the hryvnia and improvement in inflation expectations. That has a major impact on prices, surpassing the effect of factors that push prices upwards, particularly the effect of the sustained consumer demand,” the statement reads.
Inflation will continue to decline towards the target of 5%, the NBU believes. As before, inflation is projected to decline to 6.3% as of the end of 2019, and to meet the target range in early 2020, and reach the medium-term target of 5% at the end of 2020.
The NBU forecasts that the key policy rate will be cut further, to 8% as of the end of 2021, provided that inflation steadily declines to its 5% target.
"As before, the largest decrease in the key policy rate is expected to take place in 2020, along with inflation returning to its target range and inflation expectations improving. If the above inflation risks, both internal and external, materialize, the key policy rate could decline to 8% more slowly. That said, the key policy rate could be cut, to 8%, much more quickly,” the NBU said.
The regulator added that these cuts will greatly depend on whether or not key internal reforms speed up. "These reforms are those that are envisaged in the memorandum of understanding signed by the Ukrainian government and the NBU, and the judicial reform required to establish the rule of law in Ukraine."