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Kazakhstan cuts rate another 50 bps, inflation in range

June 5, 2017 by CentralBankNews   Comments (0)

    Kazakhstan's central bank cut its base rate by a further 50 basis points to 10.50 percent as inflation is now within the bank's target range and said further cuts within the next 12 months were not ruled out if inflation develops as expected and there are no negative economic shocks.
     The National Bank of Kazakhstan (NBK) has now cut its rate 150 basis points this year and by 650 points since embarking on an easing cycle in May 2016 as inflation has eased and the exchange rate of the tenge has gradually appreciated.
     The inflation rate in Kazakhstan was steady at 7.5 percent in May and April and has been decelerating after hitting 17.7 percent in July.
      Inflation is now sustainably within the NBK's target range of 6-8 percent, with households' inflation expectations moderate and the central bank expects inflation to remain within its range this year and in 2018 though a slight pickup may be possible by the end of this year.
     However, the central bank added that it was not planning to tighten monetary conditions in response to a limited increase in inflation from higher costs.
     While the NBK targets inflation of 6-8 percent this year, it is targeting inflation of 5-7 percent in 2018.
    "The risks of inflationary pressure in case of a very fast recovery of the economy and aggregate demand are not considered as significant," the NBK said, adding business activity is improving and consumer demand is gradually recovering while surveys show positive expectations.
     Last month the International Monetary Fund said Kazakhstan's economy is expected to grow by 2.5 percent this year as oil production rises and fiscal spending stimulates activity with the medium-term outlook improved and growth in the non-oil sector slowly picking up to 4 percent as bank lending resumes and structural reforms take hold.
     Kazakhstan's Gross Domestic Product grew by an annual rate of 3.4 percent in the first quarter of this year, up from 1.0 percent in the fourth quarter of last year and contraction of 0.1 percent in the first quarter of 2016.
      The exchange rate of the tenge has been steadily appreciating since January 2016 and was trading at 313 to the U.S. dollar today, up 6.5 percent this year.
     The tenge fell sharply in August 2015 after the central bank moved to a floating exchange rate in response to capital outflows and the conversion of many tenge bank deposits to foreign currency.
     But the majority of deposits in banks are now in tenge as expectations about its value by both professionals and consumers are stable.
     The central bank said the "undervalued (weak) real exchange rate of the tenge" is supporting the country's producers and demand for credit is helped by a fall the real interests rate.


     The National Bank of Kazakhstan issued the following statement:

"The National Bank of Republic of Kazakhstan has decided to reduce the base rate to 10.5% with a corridor of +/-1%.
The annual inflation sustainably remains within the target range, the inflation expectations of households stay moderate, and the signs of recovery of the economic activity are being observed. Considering the arising monetary conditions and in the absence of the shocks, the inflation will remain within the target range in 2017 and 2018.

The risks of the inflationary pressure in case of very fast recovery of economy and aggregate demand are not considered as significant. In case of the realization of the basic scenario of economic development (the oil price – 50 US dollars per barrel), and also in the absence of the negative shocks and should the actual inflation is in the line with the forecasted parameters, the possibility of the further cut of the base rate within the 12-month horizon is not ruled out. The NBK will maintain the real base rate on the level which is associated with the long-run potential rate of the economic growth. However, the assessment of the less favorable to the economy of Kazakhstan scenario suggests more conservative approach with respect to the base rate.

The decision on the base rate was made with the account of the following factors. The annual inflation rate on the level of 7.5% in May 2017, was within the target range and completely corresponds to the estimates of the National Bank.

The shock of supply for certain types of food products which was observed over the past few months, in particular for vegetables and meat, is partially offset by the decline in the FAO index for the third consecutive month, without causing significant changes in food inflation. The expected seasonal growth in the domestic supply of food products, according to estimates, will contribute to a further slowdown in annual inflation till the end of the third quarter of 2017. Herewith, due to the low base of the 4th quarter of 2016, a slight short-term increase in annual inflation may be possible by the end of this year. The National Bank does not consider necessary to tighten monetary conditions in response to a deliberately limited increase in inflation associated with an increase in costs on the supply side and not directly dependent on lending conditions from the demand side.

Households’ expectations on future level of inflation remain practically unchanged, individual fluctuations are not significant and do not affect the overall trend. The quantitative assessment of the expected inflation for the year ahead (6.1%) was fixed below the level of the actual inflation, which indicates its gradual convergence to the target range set for 2018. Due to the stable expectations of the population and professional participants of the FX market on preservation the tenge exchange rate at the current level, currency preferences of depositors continue to change. In May, according to preliminary data, the excess of the share of tenge deposits over the foreign currency deposits that was achieved in March 2017 is preserved.

Business activity in the economy demonstrates significant revival, without exerting proinflationary pressure. Short-term economic indicator for the basic sectors of the economy is in the growth zone. It has reached the maximum value for the last 3 years - 107.1% in April 2017. The results of the households’ survey on the economic prospects confirm the observed trend and indicate the presence of positive expectations of economic agents. A gradual recovery of growth in the consumer demand is observed. In January-March, real incomes of the population grew by 2.4%, which is mainly explained by an increase in budget expenditures for social payments.

External conditions supported the growth of the Kazakhstan’s economy. In May world oil prices were in the range of 48-54 US dollars per barrel showing a slight increase for most of the month.
Monetary conditions after the base rate cut are eased from moderately tight to neutral. In addition to the undervalued (weak) real exchange rate of the tenge, which supports price competitiveness of Kazakhstan’s producers, the real interest rate is decreasing (i.e., the nominal rate adjusted for the targeted inflation rate - 6-8% for 2017 and 5-7% for 2018), which will encourage the demand for credit resources of banks. However, despite the excess liquidity, the limited bank capital is a more significant factor that restraining the supply of credit, than the cost of funding.

The next decision on the base rate will be announced on July 5, 2017 at 17:00 Astana time"

     www.CentralBankNews.info

Angola holds rate as inflation continues to decelerate

June 3, 2017 by CentralBankNews   Comments (0)

    Angola's central bank left its benchmark BNA rate at 16.0 percent, with its monetary policy committee "noting that year-on-year inflation continued on its downward trajectory beginning in January 2017."
     The National Bank of Angola (BNA) has maintained its rate since June 2016 when it raised it to the current level to curb rising inflation. Last year the BNA raised its key rate 500 basis points.
     Angola's inflation rate, as measured by consumer prices in the province of Luanda, eased to 36.33 percent in April from 37.86 percent in March, according to the BNA.
     Nationally, inflation eased to 34.8 percent in April from 36.52 percent in March for the fourth  consecutive month of declining inflation since December 2016 when inflation hit 41.12 percent.
     Angola's inflation rate began accelerating in early 2015 as the fall in crude oil prices dented government revenue and foreign exchange earnings, weakening the kwanza's exchange rate and pushing up import prices and inflation.

      The BNA has devalued the kwanza several times in recent years and has been quoting the kwanza around 165 per U.S. dollar since mid-April 2016. In January last year the central bank let the kwanza ease to around 155 from around 135, the rate it had targeted since September 2015.
    Today the BNA said the average exchange rate of the kwanza in the primary foreign exchange market was unchanged at 165.91 per dollar and the central bank had sold the equivalent of US$815.27 million to commercial agents in April, down from $2.192.57 billion in March.
     Credit to the economy had risen 0.28 percent in April while government deposits in the banking system had decreased 5.99 percent, the BNA said in a statement issued today following a meeting of its monetary policy committee on May 30.
     The next meeting of the policy committee is June 30.


     

Dominican Rep. maintains rate, sees growth of 5-5.5%

June 3, 2017 by CentralBankNews   Comments (0)

    The Dominican Republic's central bank left its monetary policy rate at 5.75 percent, saying inflation is forecast to remain within its target range and economic growth this year should be between 5.0 and 5.5 percent, in line with its monetary program's projection.
     The Central Bank of the Dominican Republic (BCRD) raised its rate by 25 basis points on April 2 in the first hike since November last year due to an acceleration in inflation in February.
     Since then inflation has continued to rise but at a slower pace.
     Inflation in February jumped to 3.34 percent from 2.33 percent in January, but then eased to 3.14 percent in March before rising to 3.51 percent in April.
     The BCRD, which targets inflation of 4.0 percent, plus/minus 1 percentage point, added that underlying inflation, which is related to monetary conditions, amounted to 2.16 percent in April.
     Economic activity in the Dominican Republic grew by 5.2 percent in the first quarter of this year, gradually approaching the country's potential, but preliminary data for economic activity shows more moderate growth in April due to intense rains in some parts of the country, the bank said.
     Despite this, growth is seen in the range of 5.0-5.5 percent this year, down from an estimated 6.6 percent in 2016.
      Last month the International Monetary Fund said the economic outlook for the Dominican Republic was favorable, while the recent rise in fuel prices will push inflation to the target.
       The IMF forecast 2017 growth of 5.3 percent and 5.0 percent in 2018 and average inflation of 3.9  percent this year and 4.2 percent next year.

    www.CentralBankNews.info

   

Brazil cuts rate 100 bps but expects smaller cut in July

June 3, 2017 by CentralBankNews   Comments (0)

     Brazil's central bank lowered its benchmark Selic rate by another 100 basis points to 10.25 percent but said a more moderate rate cut relative to today's cut was likely appropriate at its next policy decision in late July.
     The Central Bank of Brazil has now cut its rate by 400 basis points since embarking on an easing cycle in October 2016 and by 350 basis points this year alone.
     Today's rate cut was widely expected as economists doubted that Brazil's second presidential crises in a year would sway the central bank from continuing to lower rates in synch with falling inflation and inflation expectations.
     While the central bank's monetary policy committee, Copom, said the size of another rate cut on July 26 - when the next meeting is scheduled - is likely be less than today's cut, it added "the pace of monetary easing will continue to depend on the evolution of economic activity, the balance of risks, possible reassessments of the extension of the cycle, and on inflation forecasts and expectations."
     In October and November last year the central bank cut the rate by 25 basis points each time and then accelerated the pace of easing to 75 points in both January and February this year. This was followed by cuts of 100 points in April and today.
     While Copom said inflation developments remained favorable with "widespread" disinflation, it underscored heightened uncertainty surrounding its inflation forecasts with the speed of economic reforms and changes to the Brazilian economy as the main risks factor.
      While Brazil's economy is improving after two years of deep recession, the central bank cautioned that sustained uncertainty over economic reforms "can have detrimental effects on economic activity."
     As in April, Copom was unanimous in its policy decision and said it is still assuming that the Selic rate will end at 8.50 percent by the end of this year and then remain at that level until end-2018.
     Copom's inflation projection for this year were once again lowered to 4.0 percent from 4.1 percent in forecast in April but then raised to 4.6 percent from 4.5 percent.
      Brazil's inflation rate in April eased to 4.08 percent from 4.57 percent in March, within the central bank's inflation target of 4.5 percent, plus/minus 1.5 percentage points.
      After falling in 2014 and 2015, Brazil's real has firmed since early 2016 though it was hit by news of a corruption scandal that may topple President Michel Temer who became acting president in May last year after Dilma Rousseff was suspended from her duties while facing impeachment trial.
      The real was trading at 3.22 to the U.S. dollar today, up 1.2 percent this year.

      The Central Bank of Brazil issued the following statement:

"The Copom unanimously decided to reduce the Selic rate by one percentage point, to 10.25 percent per year, without bias.
The following observations provide an update of the Copom’s baseline scenario:
The set of indicators of economic activity released since the last Copom meeting remains consistent with stabilization of the Brazilian economy in the short run and a gradual recovery during the course of the year. If sustained over a long period, high levels of uncertainty regarding the evolution of reforms and adjustments in the economy can have detrimental effects on economic activity;
Stronger global economic activity has so far mitigated the effects on the Brazilian economy of possible changes of economic policy in central economies;
Inflation developments remain favorable. Disinflation is widespread and includes IPCA components that are most sensitive to the business cycle and monetary policy. It is necessary to monitor possible impacts of higher uncertainty on the prospective path of inflation;
Inflation expectations for 2017 collected by the Focus survey fell to around 4.0%. Expectations for 2018 are around 4.4%, and expectations for 2019 and longer horizons are around 4.25%; and
The Copom’s inflation projections for 2017 and 2018 in the scenario with interest rate and exchange rate paths extracted from the Focus survey are around 4.0% and 4.6%, respectively. This scenario assumes a path for the policy interest rate that ends 2017 at 8.5% and remains at that level until the end of 2018. The Committee emphasizes that its conditional inflation forecasts currently involve a higher level of uncertainty.
The Committee views the heightened uncertainty regarding the speed of the process of reforms and adjustments in the Brazilian economy as the main risk factor. This arises from both a higher probability of scenarios that may hinder this process, and the difficulty in assessing the effects of these scenarios on the determinants of inflation.
Taking into account the baseline scenario, the balance of risks, and the wide array of available information, the Copom unanimously decided to reduce the Selic rate by one percentage point, to 10.25 percent per year, without bias. The Committee judges that convergence of inflation to the 4.5% target over the relevant horizon for the conduct of monetary policy, which includes 2017 and, to a greater extent, 2018, is compatible with the monetary easing process.
The Copom emphasizes that the extension of the monetary easing cycle will depend, among other factors, on estimates of the structural interest rate of the Brazilian economy. The Committee judges that the recent increase in the uncertainty regarding the evolution of reforms and adjustments in the economy hampers a more timely reduction of estimates of the structural interest rate, and makes them more uncertain. The Committee will continue to reassess these estimates over time.
In light of the basic scenario and current balance of risks, the Copom judges that a moderate reduction of the pace of monetary easing relative to the pace adopted today is likely to be appropriate at its next meeting. Naturally, the pace of monetary easing will continue to depend on the evolution of economic activity, the balance of risks, possible reassessments of the extension of the cycle, and on inflation forecasts and expectations.
The following members of the Committee voted for this decision: Ilan Goldfajn (Governor), Anthero de Moraes Meirelles, Carlos Viana de Carvalho, Isaac Sidney Menezes Ferreira, Luiz Edson Feltrim, Otávio Ribeiro Damaso, Reinaldo Le Grazie, Sidnei Corrêa Marques, and Tiago Couto Berriel."

    www.CentralBankNews.info

Kyrgyzstan maintains rate, inflation seen around target

June 3, 2017 by CentralBankNews   Comments (0)

    Kyrgyzstan's central bank left its benchmark discount rate at 5.0 percent, confirming that it still expects inflation to be close to its target of 5-7 percent by the end of this year with the current level of the discount rate helping stimulate the economy.
    The National Bank of the Kyrgyz Republic (NBKR) has maintained its rate since December 2016 when it last cut it as part of a 500-basis-point easing cycle that began in March 2016.
     Kyrgyzstan's inflation rate was estimated by the central bank at 3.7 percent in May, down from 3.8 percent in April but up from 2.8 percent in March.
     Between September and December last year inflation was negative and the NBKR does not expect inflation to exceed its target range in the medium term.
     Higher prices are supported by a recovery in domestic consumption, remittances from workers abroad and higher external demand, the bank said.
     Kyrgyzstan's economy is growing, with Gross Domestic Product up by an annual 7.7 percent in the January-April period, up from 3.8 percent in the fourth quarter of last year. Excluding output from the Kumtor gold mine, GDP was up 4.0 percent.
     Last month the International Monetary Fund forecast 3.5 percent growth this year as external and internal demand continue to improve.
     The domestic foreign exchange market remains stable, the central bank said, adding the tendency of the som to strengthen is continuing, with the exchange rate this year up 1.9 percent as of May 26.
     During the month of May, the central bank said it didn't intervene in the foreign exchange market.
     Between March 18 and April 27 the som rose 3.1 percent to 67.2 per dollar but has since then it has eased to trade at 68.0 today, up 1.8 percent since the start of this year.
    In April dealers reported that the central bank had intervened by buying U.S. dollars and the IMF has recommended the NBKR should only intervene to mitigate excessive volatility.

    www.CentralBankNews.info

Kenya maintains rate as inflation seen above target

June 3, 2017 by CentralBankNews   Comments (0)

    Kenya's central bank kept its Central Bank Rate (CBR) at 10.0 percent, as expected, saying its current policy stance had reduced the threat of demand-driven inflation, which is still expected to remain above the government's target in the near term due to higher prices of some food items.
    The Central Bank of Kenya (CBK), which has maintained its rate since cutting it to the current level in September 2016, added recent rains and intervention by the government are expected to provide some relief to the recent rise in food prices, with non-food, non-fuel inflation stable at 5.0 percent, suggesting that demand pressures and pass-through of higher food prices are muted.
     Kenya's headline inflation rate rose to 11.5 percent in April from 10.3 percent in March to the highest level since May 2012 as drought pushed up prices of maize flour, sugar, kales and tomatoes.
     Kenya targets inflation of 5.0 percent, plus/minus 2.5 percentage points.
     But Kenya's shilling has remained stable this year, supported by a narrower current account deficit as tourism, coffee exports and remittances from abroad have remained strong. Tea and horticulture has remain resilient despite lower export volumes from adverse weather in the first quarter.
     The shilling was trading at 103.3 to the U.S. dollar today, down 1 percent this year.
     The CBK added its foreign exchange reserves were at all-time high levels and currently at US$8.239.9 billion, or 5.4 months of imports, up from $7.716.4 billion end-March. Together with IMF arrangements of $1.5 billion, this continues to "provide a buffer against short-term shocks."
     In September last year Kenya's government imposed a cap on banks' interest rates and the CBK said a May private market perception survey showed marginally weaker expectations for economic growth from its March survey due to the impact of drought and a slower private sector growth.
     Data shows that the number of loan applications rose by 23.4 percent from August 2016 to April 2017, but the value of the applications fell by 18.3 percent. Loan approvals rose 35.7 percent while their value fell by 16.3 percent, the central bank said.
     However, the central bank added that credit to private households, manufacturing, and real estate had picked up in March and April this year.
     Kenya's economy expanded by 5.8 percent in 2016, up from 5.7 percent in 2015.

   
      The Central Bank of Kenya issued the following statement:

"The Monetary Policy Committee (MPC) met on May 29, 2017, to review the outcome of its policy decisions and recent economic developments. The meeting was held against a backdrop of improved weather conditions, expectations of lower food prices, and general macroeconomic stability.
  •   Month-on-month overall inflation rose to 11.5 percent in April from 10.3 percent in March 2017, due to increases in food prices, notably sifted maize flour, sugar, kales (sukuma wiki) and tomatoes. Nevertheless, the recent rains and interventions by the Government are expected to provide some relief. Non-food-non-fuel (NFNF) inflation remained stable below 5 percent, suggesting that demand pressures and pass-through effects of high food prices are muted.
  •   The foreign exchange market has remained stable, supported by a narrower current account deficit. Receipts from tea and horticulture are resilient despite lower export volumes due to adverse weather conditions in the first quarter of 2017. Additionally, receipts from tourism, coffee exports, and diaspora remittances have remained strong.
  •   The CBK’s foreign exchange reserves are at all-time high levels. They currently stand at USD8,235.9 million (5.4 months of import cover) compared to USD7,716.4 million (5.1 months of import cover) at the end of March 2017. These reserves, together with the Precautionary Arrangements with the International Monetary Fund (IMF), equivalent to USD1.5 billion, continue to provide a buffer against short-term shocks.
  •   The predictability in government domestic borrowing has continued to support a stable yield curve, and the domestic target for FY 2016/2017 remains achievable.
  •   The banking sector remains resilient. The average commercial banks’ liquidity and capital adequacy ratios stood at 44.4 percent and 18.8 percent, respectively in
    April 2017. The average liquidity ratio rose in April partly due to increased deposits. The ratio of gross non-performing loans to gross loans decreased marginally to

    9.6 percent in April from 9.7 percent in February 2017.
  •   On the slowdown in private sector credit growth, which was largely due to factors in
    trade, manufacturing, real estate, and private households, the Committee noted that credit to private households, manufacturing, and real estate had picked up in March and April 2017.
    •   The Committee evaluated available data on the impact of capping interest rates. The number of loan applications increased by 23.4 percent between August 2016 and April 2017, but the value of loan applications decreased by 18.3 percent, suggesting smaller size of loan applications. The number of loan approvals increased by
      35.7 percent while their value decreased by 16.3 percent. Moreover, commercial banks’ lending to Micro, Small and Medium Enterprises (MSMEs) fell by an estimated 5.7 percent between August 2016 and April 2017, but with small banks recording an increase on average.
    •   The MPC Private Sector Market Perception Survey conducted in May 2017, showed marginally weaker growth expectations relative to the March survey on account of the impact of drought in the first quarter of 2017, and the slowdown in private sector credit growth. Nevertheless, the respondents expect the ongoing public infrastructure development to continue to support growth.
    •   Although a modest pick-up in global growth is expected in 2017 there are considerable risks to the outlook. Uncertainties remain on the economic policies of the U.S. administration, the Brexit outcome, and normalization of monetary policy in the advanced economies. These risks also have potential implications on global financial market stability.
      The Committee concluded that overall inflation is expected to remain above the Government target range in the near term due to elevated prices for some food items. Nevertheless, the prevailing policy stance had reduced the threat of demand driven inflation. The MPC therefore decided to retain the Central Bank Rate (CBR) at
      10.0 percent. The Committee will continue to closely monitor developments in the domestic and global economies, and stands ready to take additional measures as necessary."

      www.CentralBankNews.info

Fiji maintains rate as 2017 growth forecast revised up

May 27, 2017 by CentralBankNews   Comments (0)

    Fiji's central bank kept its Overnight Policy Rate (OPR) at 0.50 percent - unchanged since October 2011 - and confirmed last week's upward revision of its 2017 growth forecast to 3.8 percent from October 2016's forecast of 3.6 percent.
     The Reserve Bank of Fiji also said its dual monetary policy objectives remain intact, with inflation easing to 4.1 percent in April from 5.6 percent in March, and foreign reserves of $2.240 billion as of May 25, up from $1.991 billion as of March 30, sufficient to cover 5.6 months of imports.
     Fiji's economy was hit hard in February 2016 by Tropical Cyclone Winston, the worst ever cyclone in the Southern Hemisphere, resulting in higher inflation from a shortage of some food items, including the national drink of yaqona.
      Inflation this year will continue to be affected by domestic supply shortages but price hikes in the wake of the cyclone are expected to taper off, with inflation expected to fall to 3.0 percent by the end of this year as supply normalizes for most agricultural products, according to Barry Whiteside, central bank governor.
      The outlook for Fiji's economy has improved this year due to the spill-over of last year's reconstruction from cyclone-related damages, especially the construction sector, and the wholesale and retail sector benefitting from increased sales of hardware and related building items.
     Except for the sectors of fishery, forestry and mining, all other sectors are supported by buoyant consumption and improving investment activity. Manufacturing will be underpinned by an expected rebound in cane production, Whiteside said.
     Last week the central bank revised upward its 2017 growth projection and maintained its 2018 growth forecast of 3.0 percent compared with 2016's estimated growth of 2.0 percent.
     For 2019 the economy is forecast to grow 2.9 percent.
     Fiji's 2017 current account deficit, excluding aircraft, is forecast around 5.4 percent of Gross Domestic Product but the capital and financial account balance is expected to show a bigger surplus than the 7.0 percent of GDP previously forecast due to higher inflows of foreign direct investment and the disbursement of a US$50 million loan from the Asian Development Bank for cyclone-related recovery work, the central bank said last week.



    The Reserve Bank of Fiji issued the following statement:

"At its monthly meeting on 25 May, the Reserve Bank of Fiji Board agreed to maintain the Overnight Policy Rate at 0.5 percent.


In conveying the decision, the Governor and Chairman of the Board, Mr Barry Whiteside stated that, “domestically, real sector outcomes have been mixed to date, however, aggregate demand conditions remain positive, largely underpinned by buoyant consumption and improving investment activity.
Mr Whiteside added that, “the domestic growth outlook has improved this year, largely from the spill-over of post Tropical Cyclone (TC) Winston related reconstruction activities from 2016, and better-than-expected sectoral performances so far this year. Economic activity continues to strengthen supported by conducive labour market and financial conditions.” With the exception of the fishing, forestry and mining sectors, a broad-based services-led growth of 3.8 percent is forecast for the Fijian economy in 2017, following an estimated 2.0 percent expansion last year.

On the external front, Mr Whiteside highlighted that the global economy is expected to gain momentum this year, led by growth in advanced economies while prospects for emerging and developing economies remain uneven. Risks to the projections remain downward biased and include widening global imbalances and increased geopolitical tensions in the Middle East, North Africa and Korean peninsula, which can have negative repercussions for Fiji’s trading partners and eventually our external sector. On the upside, a relatively low commodity price environment continues to augur well for our commodity-importing country, particularly as import demand picks up to meet the ongoing recovery needs.”

The dual monetary policy objectives of the Bank remain intact. Inflation fell to 4.1 percent in April 2017 from 5.6 percent in March, after remaining above the 5.0 percent mark in the first quarter of this year. Inflationary pressures in 2017 continue to be dominated by domestic factors, mainly supply shortages of certain market items (particularly yaqona) which have kept prices elevated following TC Winston. However, annual inflation is expected to fall to 3.0 percent by year-end as supply for most agricultural produce normalises. As of 25 May, foreign reserves were around $2,240.0 million, sufficient to cover 5.6 months of retained imports of goods and non-factor services.

The Governor concluded that the Reserve Bank will continue to closely monitor developments and risks to the global and domestic outlook and align monetary policy as warranted."

     www.CentralBankNews.info

Ukraine cuts rate another 50 bps and sees further easing

May 27, 2017 by CentralBankNews   Comments (0)

    Ukraine's central bank cut its policy rate by a further 50 basis points to 12.50 percent and said it may continue easing its monetary policy, with the speed and size of further rate cuts based on how fast inflation falls towards the bank's target this year and in 2018.
     The National Bank of Ukraine (NBU) has now cut its rate 150 basis points this year and by 1,750 points since embarking on its easing cycle in August 2015.
     Last year the central bank cut its key rate by 800 basis points and said it expects to cut the rate this year "less markedly," noting the rate started this year at 14.0 percent. In April the NBU cut the rate by 100 basis points.
      The central bank added that an easing of its monetary policy could take other forms than rate cuts, such as a relaxation of administrative restrictions in the foreign exchange market.
      Ukraine's inflation rate fell to 12.2 percent in April from 15.1 percent in March as the exchange rate of the hryvnia continued to appreciate due to inflow of foreign exchange from agricultural and metallurgical exports despite the negative impact from halted freight traffic and the seizure of companies in the rebel-held easter regions of the country.
      The central bank said its inflation targets for 2017 and 2018 "remain within reach" and disruptions from halted freight traffic should have no significant impact on inflation.
     Inflation in May is likely to accelerate due to higher food prices and administered prices.
     The NBU targets inflation of 8.0 percent, plus/minus 2 percentage points, in 2017 and 6.0 percent, plus/minus 2 percentage points, in 2018. In its April inflation report, the central bank forecast that inflation would slow to 9.1 percent by the end of this year and 6.0 percent by end-2018.
      A major risk to reaching this target comes from the government's fiscal policy, with the NBU saying there is a risk that higher social standards and wages could be raised too much.
      The value of the hryvnia plunged by 66 percent from the start of 2014 to the end of 2015 but has been appreciating since mid-January this year.
     Today the hryvnia was trading at 26.28 to the U.S. dollar, up 2.7 percent since the start of this year, with the NBU saying it has remained committed to a flexible exchange rate regime and not countered the rise in the exchange rate but purchased excess foreign exchange to replenish its foreign reserves, with purchases topping US$1 billion this year.
      The stable situation in the foreign exchange market has helped lower inflation expectations and households have continued to actively sell foreign currency, allowing banks to maintain a supply of foreign exchange. Banks have purchased US$982 million this year, the central bank said.
     Ukraine's economy is also improving as consumer demand gains momentum, with retail turnover up by 6.1 percent year-on-year in April.
     But Ukraine's economy slowed in the first quarter as industrial output was hit by the stop in freight traffic between the government-held part of the country and the rebel-held Donetsk region.
     Gross Domestic Product grew by an annual 2.4 percent in the first quarter of this year, down from 4.8 percent in the previous quarter.

    The National Bank of Ukraine issued the following press release:

"The  Board of the National  Bank of Ukraine has decided to cut the key policy rate to  12.5%, effective 26 May 2017. The decision to ease monetary policy is consistent with the pursuit of inflation targets set for 2017-2018 and will help propel the economic growth in Ukraine.
As expected, headline inflation slowed to 12.2% yoy in April 2017.  The slowdown was  primarily due to the waning base effect (natural gas tariffs surged in April 2016, which affected this year's comparison base).
In April, actual inflation came in slightly below the projected path of annual headline inflation published by the NBU in the Inflation Report (April 2017), envisaging a slowdown in the annual CPI to 9.1% by the end of 2017. The shortfall can be attributed to weaker-than-expected underlying inflation pressures. 
Thus, in April, the hryvnia continued to appreciate against U.S. dollar, underpinned by substantial FX revenues from agricultural exports. Also, Ukraine continued to enjoy significant FX revenues from metallurgical exports despite the negative effect of the halted freight traffic across the contact line in Donetsk and Luhansk Oblasts and the seizure of enterprises in the non-government controlled areas of Ukraine.  Meanwhile, households continued to actively sell foreign currency in the cash FX market, with banks’ net FX purchases having reached USD 982 million since the start of the year.   This allowed banks to maintain the foreign exchange supply in the interbank FX market. 
In its turn, the NBU, remaining committed to a flexible exchange regime, did not counteract a gradual appreciation of the hryvnia but  has been purchasing an excess supply of foreign currency in the interbank market to replenish international reserves. Overall, the NBU’s net FX purchases have reached over USD 1 billion since the beginning of the year.   
The stable situation in the FX market brought about an improvement in inflation expectations. As a result, core inflation remained flat at 6.3% in April, while the NBU had projected it to accelerate slightly.
According to the preliminary estimates of the NBU, inflation in annual terms accelerated  in May, which was in line with inflation forecast, published in April. This acceleration was primarily driven by a rise in raw food prices and an increase in administered prices and tariffs.
In the meantime, consumer demand is gradually gaining momentum, which was also incorporated in the macroeconomic forecast approved at the previous NBU Board meeting on monetary policy. Thus, real wages kept increasing, including due to an increase in the minimum wage from the beginning of the year. As a result, retail trade turnover continues to recover, having increased by 6.1% yoy in April.
Overall, economic growth indicators are close to the NBU projections. In Q1 2017, real GDP rose by 2.4% yoy. The slower pace of GDP growth compared to the end of 2016 can be attributed to the halted freight traffic across the contact line in Donetsk and Luhansk Oblasts and the seizure of enterprises in the non-government controlled areas of Ukraine.  These developments brought about a decline in industrial production and adversely affected the wholesale trade and freight transportation performance.
The NBU considers that the inflation targets for 2017 and 2018 (8%+/-2 pp and 6%+/-2 pp, respectively) remain within reach.
According to the inflation projections published in the Inflation Report last month, inflation is expected to slow to 9.1% by the end of 2017 and to 6.0% by the end of 2018.
Slower regulated price inflation and tight monetary and fiscal policies will be the major driving force behind the disinflation. Meanwhile, a gradual recovery in consumer demand and potential supply-side shocks in global food commodity markets will pressure inflation upwards. A weakening of US dollar in global markets that can potentially push up import prices for goods, also adds to inflationary pressures.
As before, the NBU expects that the halted freight traffic across the contact line in the Donetsk and Luhansk oblasts will have no significant impact on the headline inflation.
A major risk for the achievement of inflation targets for 2017-2018 arises from a departure from the prudent fiscal policy. In particular, there is a risk that the government will raise social standards and wages to a level higher than that consistent with the meeting of inflation targets. 
The NBU considers the implementation of a pension reform to be a vital step to ensure sustainable public finances and hence price stability in a long-term perspective. However, over the short-term, a hike in pension payments can push consumer demand up.  Consequently, the NBU may be required to adjust its policy to level off short-term repercussions of such an increase on price dynamics.  
A further progress in structural reforms, especially those specified as Ukraine’s commitments under the EFF program with the IMF, is necessary to preserve the macrofinancial stability.
Bearing in mind the inflation forecast and the balance of risks pertaining its implementation, the NBU Board has decided to cut its key policy rate to 12.5%.
Looking ahead, the NBU may continue easing the monitory policy, provided the mentioned risks will be diminishing in a sustainable manner.  
The speed and the size of a further key policy rate cut will be conditioned on the assessment of mid-term risks associated with the achievement of inflation targets in 2017, and, more importantly, in 2018. In contrast to 2016 when the key policy rate was cut by 8 p.p., the rate is expected to decrease less markedly in 2017, at the beginning of which the rate was 14% per annum.  
At this, the easing of monetary policy, when proceeded, can take different forms - both by reducing key policy rate and relaxing administrative restrictions in the FX market. 
The key policy rate cut to 12.5% has been approved by NBU Board Decision No. 318-D On the Key Policy Rate of 25 May 2017.
The next meeting of the NBU Board on monetary policy issues will be held on 6 July 2017 as scheduled."


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