Inflation slows to 4.1% ytd in 2019, much below the targeted level

UKRAINE - In Brief 09 Jan 2020 by Dmytro Boyarchuk

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CPI slowed to 4.1% ytd or 7.9% y/y in 2019 down from +9.8% ytd or +10.9% y/y a year ago, beating any projections for the year. The NBU aimed +6.3% ytd but now consumer inflation is more than 2ppt below the target. Falling transportation prices (-2.4% ytd vs. +12.9% ytd in 2018), sliding utilities tariffs (-1.9% ytd vs. +10.6% ytd in 2018) as well as slowing food prices (+4.8% ytd vs. +7.8% ytd in 2018) contributed the most to that sharp CPI slowdown through the year. In particular, transportation prices shaved 1.8 ppt from inflation, food prices cut 1.2 ppt and utilities tariffs cut 0.7 ppt which totals up to 2/3 of CPI decline in 2019. What’s next? In fact, the result has messed up the NBU plans. Monetary authorities anticipated spending at least the next two-three years targeting 5% inflation. Now they already have much lower inflation. Pressure for stronger policy rate cuts and for more aggressive easing policy will only strengthen. Against this backdrop the NBU will have to adjust the story it's telling to the markets. I would say the NBU will have to think about more active leveraging of additional easing tools on the top of further policy rate cuts. Also I would expect the NBU to reconsider their simplistic approach to the hryvnia appreciation tendency.