The National Bank of Ukraine raised the discount rate from 14.5% to 16% due to high inflation, which significantly exceeded the regulator's forecast.
"In 2017, consumer inflation rose to 13.7% and exceeding the National Bank's target of 8% ± 2 pp, set by the Basic Principles of Monetary Policy for 2017 and the medium-term perspective. The harder monetary policy will help gradual decline in consumer inflation and its return to the target range by the middle of 2019," the central bank said in a statement on Thursday, 25 January.
The regulator expects that inflation will gradually slow down in the coming years but will remain high in 2018: 8.9% total and 8.2% basic.
The NBU explained that last year's rise in price of raw products (primarily meat and milk) this year affected food prices for products with a high degree of processing. Also, the factors contributing to inflation will be the active growth of consumer demand amid rising social standards; delay in obtaining the fifth tranche of the IMF; high inflation expectations of the population and business against the background of devaluation; a rapid increase in world oil prices.
In 2019, inflation should return to the target range of 5.8% by the yearend. In 2020, inflation will slow to 5.0%, which will correspond to the central value of the range of 5.0% ± 1 percentage point.
The discount rate in Ukraine hit a maximum value of 30% amid the early 2015 crisis. The National Bank has consistently lowered it since September 2015. In the summer of 2017 this process came to a halt, and at the end of October the regulator for the first time in a long period raised the discout rate.
The central bank's discount rate, or base rate, is a monetary tool by means of which the NBU establishes a benchmark for commercial banks on the cost of attracted and placed monetary resources. The discount rate is the lowest among NBU interest rates and is a fundamental indicator for estimating the value of borrowed money.