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.