National Bank of Ukraine expectedly cuts refinancing rate to 13% pa

MOSCOW. June 13 (Interfax) - The National Bank of Ukraine (NBU) has decided to cut the key policy rate to 13% per annum from the current 13.5% pa as of June 14, Ukrainian media reported, citing the NBU's statement on its Telegram channel.

This decision accounts for the current balance of risks, subdued inflation indicators, and the continuing improvement in inflation expectations.

"Another step to trim the refinancing rate is in line with maintaining the protection of hryvnia savings from inflation while also contributing to further revival in lending, which is important for economic recovery," the NBU said.

Market participants had expected a cut of 0.5-1 percentage point in the refinancing rate.

The NBU said that after a long period of decline, inflation remained unchanged in April and rose only slightly in May - to 3.3% in annual terms. Such pace of growth in consumer prices was lower than the NBU had expected. However, the underlying inflationary pressure was in line with the forecast- core inflation was 4.4%. Inflation is expected to accelerate moderately in the coming months and exceed the target range by the end of the year.

To keep inflation expectations under control and keep inflation moderate in 2024, and bring it into its target range of 5% +/- 1 pp in the following years, the NBU will continue its policy of protecting hryvnia savings from inflation, and also will cover the structural deficit of foreign currency and smooth out excessive exchange rate fluctuations in order to ensure the sustainability of the currency market.

Inflows from international partners and internal efforts to mobilize financial resources will make significant state budget expenditures possible. Inflows of external assistance are expected to increase in the coming weeks, with Ukraine expected to receive $2.2 billion from the IMF in addition to 1.9 billion euros from the EU.

The course of the situation in Ukraine continues to be the key risk to inflation dynamics and economic development. A potential increase in indirect taxes and excise duties to finance budget needs could also contribute to higher inflation rates this year. This increase will support the country's defense capabilities and the sustainability of public finances.

"Several scenarios are still likely and would reduce inflationary pressures and boost economic recovery. They include the transfer of funds from immobilized Russian assets to Ukraine. In particular, Ukraine expects a decision on the use of these to be made following the G7 meeting," the NBU said.

The baseline scenario of the April macroeconomic forecast envisaged a cut in the key policy rate to 13% this year, but the NBU is ready to adapt its monetary policy if the balance of risks to inflation and the currency market changes.

The rate had been 13.5% since April 26, when it was lowered from 14.5%.