In countries with less disciplined central banks, Ukraine’s recent election cycle might have disrupted monetary policy. The election of President Zelensky and his Servant of the People party in parliament was one of Ukraine’s most dramatic political upheavals in recent memory.
While there was certainly incentive for the struggling incumbent to cajole some easing-fuelled economic growth from the National Bank of Ukraine, Governor Yakiv Smolii remained firm, keeping interest rates high to combat inflation. “We managed to stay away from politicking, maintain our independence, and continue working on ensuring price and financial stability, no matter what,” says Smolii.
The global economy appears to be entering a period of slowing growth and high uncertainty. Smolii sees “the risk of a global crisis” ahead. “The trade conflict between the two largest economies in the world… caused global demand to slow in September and worsened conditions for Ukrainian exporters,” says Smolii. However, he highlights “growing consumer demand and record growth in grain yields in Ukraine” as reasons for optimism around Ukraine’s growth.
Thanks to the NBU’s tight monetary policy, inflation started heading downwards for the first time in five years in 2018. The NBU expects it to hit the 5% target by the end of 2020, and began to cut policy rates earlier this year, lowering it by 3.5 percentage points to 16.5%. “Our baseline strategy envisages the key policy rate decreasing to 8% over the coming years,” says Smolii, although he acknowledges this will “depend on both internal and external risks.”
He also highlights that “if the pace of structural reforms increases, the NBU could cut the key policy rate more quickly”.
With inflation coming under control once more, Smolii wants to work with the government to achieve the ambitious economic growth targets the finance ministry has laid out. “The NBU stands ready to support the economic policy of the government, including expanding businesses’ and citizens’ access to significantly cheaper financial resources,” provided this does not conflict with the “attainment of price and financial stability”.