NBU: Key picy rate reductions may be launched earlier than projected

This is stated in the summary of key picy rate discussion by the NBU Monetary Picy Committee (MPC) on 15 March 2023, the NBU press service informs.

“Eight members of the MPC expressed a view that the regulator may switch to key picy rate reductions earlier than envisaged in its January macroeconomic forecast. A further stable and faster-than-expected slowdown in inflation can be a strong argument for cutting the rate. During the discussion, most MPC members did not specify either when or how much the key picy rate may decrease. They emphasized that it is necessary to wait for the updated macroeconomic forecast,” the summary reads.

At the same time, two MPC members pointed out that the NBU might launch a cycle of key picy rate cuts as soon as autumn. Another participant did not rule out that the prerequisites for such a decision may emerge even earlier. In addition to a quicker reduction in inflation, other prerequisites are being formed, this MPC member said. Specifically, pressure on the FX market is moderating, and the prospects for keeping international reserves at a sufficiently high level are improving, as progress in the talks with the IMF has shown.

By contrast, several MPC members urged their cleagues not to jump to conclusions about the change in the key picy rate forecast. Future decisions on the rate should take into account the high uncertainty around how the battle zone situation may unfd, one of these MPC members said. In addition, this MPC member expressed concern over the potential fallout from a new global financial crisis flowing the failure of a number of large Western banks. The maintenance of the high key picy rate since July 2022 has been one of the measures that have contained the deterioration of expectations and stabilized the FX market even as the large-scale war grinds on, this discussion participant said. Going forward, the market anticipates that the NBU will pursue a balanced picy.

As reported, in January 2022, the NBU raised the key picy rate from 9% to 10%. With the beginning of Russian aggression, the rate remained unchanged until June 3, when it was sharply raised to 25%.

At the beginning of February this year, it was reported that most members of the Monetary Picy Committee of the National Bank consider it advisable to keep the key picy rate at this level at least until the first quarter of 2024, although some say that the rate reduction cycle may begin earlier.

On March 16, 2023, the National Bank decided to keep the key picy rate at 25%.