Prime rate moves into negative territory

UKRAINE - In Brief 21 Jan 2021 by Dmytro Boyarchuk
The NBU Board left prime rate unchanged at 6%. The decision was delivered despite consumer inflation has already sped up to 6.3% y/y in January, according to the NBU Governor Kyrylo Shevchenko. Already in February inflation will break 7% ceiling. This means real policy rate from now will be in negative zone. Mr. Shevchenko at the press-briefing recognized that inflation will exceed prime rate from now but he stated that current inflation strengthening is temporary and is expected to ease in 2H 2021. The NBU anticipates 7% inflation in 2021. At the same time the NBU Governor has declared his readiness to increase prime rate if CPI accelerates faster than expected. Remarkably, majority of experts predicted prime rate unchanged, according to polls run by Reuters and by volunteers from financial market. However, many pointed that it should be increased instead. Commitment of Kyrylo Shevchenko to decrease loan rates (he made to President in July 2020) was the main reason for his reluctance to revise prime rate upwards, I believe. From February consumer inflation will be above 7% and inflation targeting policy (with 5% inflation target) requires some reaction from monetary authorities. But increased prime rate is a political problem for Kyrylo Shevchenko because it means no promised cheap loans over the nearest future.In this story the main question is why the NBU Governor pays more attention to the issue of cheaper loans and de facto puts aside inflation targeting policy. Next meeting of the Board will be on March 4, 2021.

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