Experts told, what will happen to inflation in Ukraine


NBU will not change the rate of the hryvnia.

When you look at the price tags in stores (e.g., berries) it’s hard to believe, according to official statistics, the country now has the lowest inflation rate for many years past. In the first half of the year, annual inflation slowed to 2.4%. And in may it was even lower – 1.8 per cent. Such indicators Ukraine does not remember in 2013, reports the with reference for Today.

Of course, if you focus only on food, which is the largest expenditure of the average Ukrainian family, the situation will be somewhat different. Overall, according to statistics, the products last year rose by 4.5%. Most of all – eggs (54,7%), fruits (33.7%) and bread (9.1 per cent). And vegetables, in contrast, fell by 12.5% per year.

However, perhaps the main reason for low inflation – depreciating energy. Because of this, the tariffs for housing and communal services, which also constitute a significant expense of every Ukrainian family has decreased overall by 12.2%, and actually, gas prices have fallen to 52.5%. Also statistics show a reduction in fuel prices in General 26.5%.

This low inflation is not satisfied with individual representatives of the Ukrainian authorities. Recently resigned head of the national Bank Yakov Smoliy claimed that he was under pressure, in particular, to accelerate inflation to 11%, as provided for in the macroeconomic forecast of the Ministry of economy. After the dismissal of the head of the NBU, Minister of economy Ihor Petrashko said that, in his opinion, “healthy inflation is expected to be 8-9%”. According to the official, it “will allow businesses to grow.”

The national Bank for several years ago set as a goal of monetary policy is gradually to achieve inflation, or consumer price index, at 5% +/-1%, i.e. from 4 to 6%. And to achieve this figure is planned just in 2020, then to keep inflation at approximately the same level.

Some inflation is necessary for Ukraine

Why the national Bank is focused on the 5%? The NBU is explained as follows: “Price stability is the main objective of most Central banks, including NBU. This is a situation where “households and businesses in making decisions may not take into account the expected change in the average level of prices” (a definition proposed by the head of the Federal reserve system of the United States in 1994. – Ed.). In other words, when prices rise slightly so that the ordinary citizen doesn’t even think of the question of future inflation when deciding on a loan, investing in business or savings. In most developed countries under the price stability considers support an inflation rate of 1-3%. For emerging markets the medium-term inflation target is higher and varies usually in the range of 4-8%” – explain in NBU.

Recall to maintain inflation and price stability, according to Ukrainian legislation, it is the competence of the NBU. Neither the law on the Cabinet, nor in the regulations of Ministry of economy of the problems of definition of inflation is not mentioned. However, in front of the Ministry of economy the aim is to prepare forecasts of economic and social development of Ukraine together with the national Bank and other authorities.

Previous forecasts of the Ministry of economy and the national Bank differed if the definition of inflation, that is not much. So, in October of 2019, the national Bank forecast for the year 2020 the rate of inflation (the consumer price index, or CPI) of 6.3%, and the economy then predicted inflation of 5.5-5.8 percent (in two scenarios).

However, the latest forecasts of the national Bank and the Ministry of economy differ quite substantially. So, in March, the economy Ministry revised the inflation forecast for the year 2020 to 11.6% (December to December). The national Bank, in April revised its forecast to 6%.

“Inflation is a tax on the poor”

Experts believe that a more substantiated forecast of the NBU.

“To date, based on current data and in the immutability of the commitment of the leadership of the country’s exchange rate and price stability, there is no basis for any reasonable assumptions about the failure of Ukraine’s medium-term inflation target – at 5% annual growth of consumer prices”, – says senior analyst of the Institute of socio-economic transformation Vyacheslav Cherkashin.

Inflation at 4-6% (or 5% +/-1%, as determined by the NBK) considers optimal and the President of investment group “Univer” Taras Kozak.

“In developed economies, the optimal inflation is considered to be 1-2%. In developing countries it is believed that it is better to have a slightly higher inflation of 3-5%. NBU believes that Ukraine is better 5% inflation, or more precisely, from 4 to 6%. Why high inflation is bad? Inflation is effectively a tax, which is collected from all, and especially to the poor who can’t this tax be avoided. For example, if a person has a flat, factory, land, a large number of other liquid assets, inflation does not affect these assets. It only affects incomes and savings in the national currency. First and foremost, on poor people because they have income in national currency. And increasing inflation to, say, 10% means you have 10% of their income this year will be given. Because their income will be able to buy 10% fewer goods and services. And will increase the salary by 10% with inflation at 10%? Not the fact,” explains the economist.

In the absence of economic prerequisites for inflation it would be possible “to disperse”, in particular, by increasing the quantity of money in circulation, as well as “ask” of the NBU. However, economists believe this method of “recovery” is a misnomer.

“The new leadership of the NBU can not and hopefully will not meet the requirements for the issue of money from the point of view of common sense, and from a position of observance of requirements of Ukrainian legislation. Article 54 of the law on the NBU prohibited, directly or indirectly, to Finance the costs of the government”, – said Vyacheslav Cherkashin.

Taras Kozak also reminds us that the economic effect of “money printing” in the developed countries and developing is not the same.

“We hear that, well, Americans print money, print, Europeans, and Ukrainians do not want. In fact, it is clear that Ukrainian hryvnia is the currency not of the highest category. When the Americans print dollars, the average American is not running to sell dollars and buy euros. Because the dollar is the currency of the highest category, which cannot depreciate. Yes, at some point may start inflation, but the Americans have never lived in a situation when their currency devalued ten times in the 90s,” says Taras Kozak.

Experts believe that high inflation in Ukraine heats up, but on the contrary, slow down the economy.

“I’ll explain on the example of mortgage lending. It is believed that the purchase of an apartment is around half of the total income of a person for a lifetime. Therefore, in a civilized developed world, housing is usually bought on credit. On the one hand, advantageous for the person because he doesn’t need to save life and to buy housing in 60-70 years. But on the other hand, it is important for the economy. Because this is money that is invested in the economy, and the economy starts working. But mortgage loan rate cannot be 15 or even 10%. Mortgage lending is running fine at rates less than 10%. If the rate is 10%, it turns out that every 7 years the cost of apartments doubled. And to issue mortgage loans under 7-9%, it is necessary that the cost of funding was 3-5% (plus the risk of default 1-3%, plus a margin the Bank is also 1-3%, the sum comes out to 7-9%). Correspondingly, Deposit rates also need to be 3-5%. But the Deposit rate can not be lower than inflation. Why give the money to the Bank, if it is better to go and buy something to keep the money, which will lose purchasing power? It turns out that inflation must be low enough in order to keep the national currency in the banks, so that banks can lend a mortgage. And a mortgage rate not above 10%. Thus, we come to why inflation should be low,” explains Taras Kozak.

While the course has remained the same

Recently, the national Bank announced the proposal of the Board of the national Bank of Ukraine “Basic principles of monetary policy for 2021 in the medium term”. During the presentation Deputy head of the NBU Dmitry Sologub said that to further ensure macro-financial stability and sustained economic development of Ukraine should continue its consistent monetary policy and not to sacrifice those principles on which it was based in 2015-2020.

“The aim of monetary (monetary) policy is to maintain inflation in the medium term at 5% with a permissible deviation band of +/-1%,” – said, in particular, in the document.

However, the final draft “Basic principles…” should prepare the NBU Council. It is planned that this document will be approved in September.