Kakhovka HPP disaster to add 0.3 pp to inflation in 2023 - NBU

MOSCOW. June 15 (Interfax) - The Kakhovka hydroelectric power plant disaster will add 0.3 percentage points to inflation in 2023, Ukrainian media quoted the National Bank as saying on its website.

The disaster will have an adverse impact on prices, the regulator said. By the NBU's early estimates, this will contribute about 0.3 pp to this year's inflation rate because of how it has complicated the operation of multiple enterprises, and due to the partial loss of crops, primarily vegetables, it said.

In addition, inflation will continue to decelerate because the base effect, which contributed to a significant drop in inflation in H1 2023, will gradually fade. Also, price dynamics will be affected by increases in certain utility tariffs and the announced return of pre-crisis taxes on fuels.

Inflation eased to 15.3% in annul terms in May. Apart from the base effect, the pullback in inflation was driven by an ample supply of food and fuel, a stronger hryvnia cash exchange rate, and improved exchange-rate and inflation expectations.

Although headline inflation has decelerated, underlying inflationary pressures remain rather high. Specifically, core inflation declined to only 15.6% year-on-year in May, which matches the NBU's forecast. Such dynamics indicate, among other things, that businesses' crisis-related expenses continued to pass through to the prices of goods and services.

The key risk to inflation dynamics and economic development is the longer duration, and the unpredictable nature and intensity, of the crisis, the NBU said.

Other risks also persist. They include the continued damage to critical infrastructure facilities, including energy infrastructure, the emergence of additional budget needs and substantial quasi-fiscal deficits, including in the energy sector and disruptions or a shutdown of the "grain corridor" and the ongoing limitations imposed on imports of Ukrainian food by some European countries.

Conversely, the rapid implementation of Ukraine's recovery project, together with European integration reforms, could considerably accelerate the pace of economic growth and reduce inflation at a faster rate, the NBU said.