NBU estimates Ukraine's inflation at 17% in May - bank governor
MOSCOW. May 31 (Interfax) - The National Bank of Ukraine (NBU) estimates the country's inflation in May at 17%, NBU Governor Kyrylo Shevchenko told the media.
Inflation stood at 16.4% in April, and NBU projects annual inflation in Ukraine at 20% or even higher, Shevchenko said.
The current and projected pace of consumer price growth should serve as a guideline for the Finance Ministry as regards the yield rate on hryvnia-denominated government bonds, he said.
Meanwhile, the yield on bonds issued by the ministry ranges from 9.5% to 11.5%.
Shevchenko believes that the Finance Ministry ought to raise the yield rate on government bonds, a move that will facilitate an increase in interest rates on deposits.
The transition of the economy and the financial system from market principles of management to "manual" mode after February 24 helped calm panic and stabilize the financial and economic system, Shevchenko said, at the same time adding that, as the economy gradually recovers, the negative effects of this "manual" mode of management and the enormous budget deficit are becoming increasingly felt.
"This dictates the next stage in financial and economic policy: a transition to an acceptable budget deficit with market resources of financing. It will help create preconditions for a return to traditional monetary tools and the market principles of the functioning of the currency system," he said.
This temporary "manual" mode has its price, such as tough restrictions on capital movement, reduced rates on government bonds paid by holders of promptly depreciating hryvnia-denominated savings and incomes, the presence of a fixed hryvnia exchange rate being financed by the NBU's international reserves and exporters' revenue, and tax cuts, which are largely being offset by the National Bank's emission, he said.
The Ukrainian economy is now gradually adapting, he said. For instance, businesses seek to maximize their profits, while households try to increase their incomes and protect their savings, he added.
"Therefore, it is necessary to gradually switch to more-market driven mechanisms, since running the economy in manual mode for lengthy period of time is fraught with a range of problems," Shevchenko said, listing among them dollarization and the withdrawal of savings from the financial system, a decline of Ukrainian producers' competitiveness because of lower import taxes, and attempts to turn the country's economy into a shadow economy to bypass restrictions.
Shevchenko believes that these problems could be resolved by increasing the yield on hryvnia-denominated government bonds, the National Bank's return to an active interest rate policy with a major focus on propping up the exchange rate, the reinstatement of import taxes and an additional import duty on non-critical imports.
"Following a raise of import taxes and an increase of the yield of government bonds, there will be an opportunity to gradually switch to a floating exchange rate whereby the NBU will not fix the exchange rate, but will smooth over its fluctuations," he said.
A new program with the International Monetary Fund (IMF) should become an important element of maintaining Ukraine's macroeconomic stability, Shevchenko said.
"We are now at a point where the financial system and the economy have recovered from the initial shock [...] Consequently, it is necessary already now to reconfigure the levers of the economic policy. The IMF has traditionally specialized in helping countries with difficult financial and macroeconomic conditions. IMF loans will also be welcome," Shevchenko said.
Data released by the State Statistics Service of Ukraine indicate that the country's inflation stood at 10.9% in January-April 2022. Consumer price inflation slowed to 3.1% in April from 4.5% in March, after growing by a mere 1.6% in February, and 1.3% in January. In April, inflation in annual terms rose to 16.4% from 13.7% in March, 10.7% in February, and 10% in January, the service said.