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NBU makes surprising hawkish switch

The NBU hiked its discount rate by 50bp to 8.0% p.a. and revised its base-case key rate forecast upwards, projecting another 50bp hike in 4Q21 and a series of cuts in 2Q22-4Q22 for a total of 200bp, which would bring the key rate to 6.5% by the end of next year. The previous NBU forecast envisaged a smoother key rate path, with no hikes this year and only a 50bp cut in 2022. The central bank said it was ready to proceed with rate hikes and employ other monetary instruments in case fundamental inflationary pressures appeared stronger than expected and inflation expectations worsened. The latest key rate hike was accompanied by other measures aimed at strengthening monetary policy. The NBU set its interest rate on refinancing facilities to equal the key rate + 1.0% (vs. key rate +0.0% before) effective Jul. 23; cut the indicative volume of its daily F/X interventions to $5m (from $20m before) effective Aug. 1; and confirmed the wrapping up of anti-crisis measures, particularly the termination of medium-term refinancing as of Oct. 1, 2021. The Bank also substantially worsened its 2021 inflation forecast, expecting headline CPI to surge to 11.2% in September (from 9.6% expected before) and slow only gradually to 9.6% by end-2021 (vs. 8.0% before). Yet it left the end-2022 and end-2023 projections unchanged at 5.0%, in line with its target. The Bank expects headline inflation to return to its target band of 4-6% in 2H22 (vs. 1H22 expected before), with the slowdown to be driven by supply of newly harvested agricultural products, evaporation of a low comparison base effect in prices of selected goods, downward correction in global energy prices, and the lagged impact of tighter monetary policy. The NBU kept its GDP growth forecasts at 3.8% y-o-y (2021) and around 4.0% (2022-2023), estimating that quarantine measures implemented YTD dampened 2021E growth by 0.6pp. It also improved the 2021 C/A deficit forecast to 0.4% of GDP, from 0.8% before. The NBU will publish its detailed macroeconomic forecast on Jul. 29, followed by MPC meeting minutes on Aug. 2. The next rate meeting will be held on Sep. 9.
| Daily

US, Germany announce support for Ukraine to soften Nord Stream 2 impact

The US and Germany announced yesterday a security and financial support package for Ukraine as part of their deal to allow the completion of the Nord Stream 2 (NS 2) pipeline from Russia to Germany. According to their joint statement, Germany: • Commits to take action at the national/EU levels to limit Russian energy exports to Europe “should Russia attempt to use energy as a weapon or commit further aggressive acts against Ukraine.” • Will utilize, with US support, “all available leverage to facilitate an extension of up to 10 years” to Ukraine’s gas transit agreement with Russia that expires in 2024, including appointing a special envoy to support those talks that should start no later than Sep. 1. • Will establish and administer a Green Fund for Ukraine of at least $1bn, with Germany’s initial donation of $175m and further potential private-sector investments, to support Ukraine’s renewable energy sector, facilitate the development of hydrogen, and accelerate the transition from coal. In addition, Germany will provide $70m for bilateral renewable and coal transition projects with Ukraine. • Is ready to launch a Ukraine Resilience Package to increase the capacity for reverse flows of gas to Ukraine from the EU to stave off potential Russian attempts to cut gas supplies to the country. The package would also include technical assistance for Ukraine’s integration into the European electricity grid. • Will adhere to the Third Energy Package with respect to Nord Stream 2 to ensure unbundling and third-party access, including an “assessment of any risks posed by certification of the project operator to the security of energy supply of the EU.”
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