You're reading: NBU says it could ease monetary policy by late 2015 (UPDATED)

The National Bank of Ukraine (NBU) expects that the restoration of control over inflation and the strengthening of monetary stability will allow it closer to the end of 2015 to ease monetary policy to support economic activity.

“If inflation expectations remain well anchored, inflation subsides in line with program projections, and the foreign exchange market stability continues, the monetary policy stance could be eased later in the year to support economic activity,” reads the updated memorandum of economic and financial policies of Ukrainian authorities to the International Monetary Fund (IMF), posted on the NBU’s website.

“For the time being, the current monetary policy stance remains appropriate given our near-term inflation projections and current inflation expectations (15–20 percent for the year to June 2016). Keeping the policy interest rate positive in real terms on a near-term forward-looking basis is essential to achieving our operational NIR (net international reserves)/NDA (net domestic assets) targets through open market operations and anchoring inflation expectations. The NBU will monitor closely incoming data to ensure that inflation decelerates as projected and second-round effects from the exchange rate depreciation and energy price hikes remain contained. If inflation expectations are well anchored, inflation is under control, and foreign exchange market stability is entrenched, we will consider easing the monetary policy stance later in 2015 to support economic activity. Conversely, if despite our expectations inflation repeatedly surprises on the upside, or strong exchange rate depreciation pressures return, we will tighten policy as needed to address these adverse developments,” reads the document.

“We expect that our policy program and the financial support of the international community will lead to steady improvement in the balance of payments, financial stability, and the return of depositors’ and investors’ confidence, which will set the stage for the safe removal of these administrative measures in due course. To this end, we have prepared a roadmap and will begin implementing it in a gradual and cautious manner once the following prerequisites are met: a successful completion of the debt operation, full implementation of bank recapitalization based on the results of the 2014 diagnostic studies, a target level of the NBU’s net international reserves as specified in the roadmap for the first stage of the liberalization, and full transition of Naftogaz to the interbank market for its forex purchases,” the document said.

As reported, the IMF in its updated program worsened its forecast for inflation this year to 45.8 percent from 26.7 percent in the initial March estimate, while increasing the evaluation of the fall in GDP from 5.5 percent to 9 percent. For the following year, the forecast for inflation was also worsened from 8.7 percent to 12 percent, but the estimated growth in GDP remained at 2 percent.

It is expected that in 2017, inflation will slow to 8 percent, and in the next three years – to 5 percent.