The NBU hiked the policy rate by 1.0 ppt up to 10.0% amid Russian risks

UKRAINE - In Brief 20 Jan 2022 by Dmytro Boyarchuk
The NBU Board increased the policy rate by 1.0 ppt up to 10.0% today. Consensus was that the increase would be 0.5 ppt but after the recent sell-off of Ukraine, a 1.0 ppt hike was not a surprise at all. Russian risks are driving withdrawal by non-residents from local UAH-denominated state bonds, which is pressuring the hryvnia and complicating deficit financing for MinFin. This issue was the main reason why the NBU made a strong tightening move this time. The NBU is also giving a clear message that further nervousness around this story about the Russians will require more tightening steps further on. The press release says that disinflation is present but prices are easing much more slowly than expected. That is why the NBU revised its CPI forecast up to 7.7% in 2022 from 5%, estimated previously. Higher energy prices over the course of 2022 as well as potential utility tariff adjustments in the domestic market are the key reasons for the CPI estimate revision. I would agree that inflation might be higher than initially expected in 2022 but I have doubts about the authorities' adjusting natural gas prices and heating tariffs. Still the NBU has to declare its belief in this move to please the IMF officers. The next meeting of the Board will be on March 3, 2022. We can only guess whether Moscow’s blackmailing will end by that time or not. But we stick to our view that the Kremlin is unlikely to unleash a real offensive. The current loud information campaign from the West is the right move to prevent military scenario. However, withdrawal by non-residents on the heels of all this noise is the price of weathering this geopolitical tension without arms and casualties.

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