January 25, 2018 | Cbonds
Following MPC meeting held on Jan 25th, Ukraine’s central bank increased its key rate by 150 b.p., to 16%. As we reported before, the visibility to anticipate interest rate decision became more obscured, with most of market participants having expected no change. During one of the last meetings in NBU on Jan 15th, polls suggested 62% expectation of no change in Jan 25th meeting.
In a broad regional context, inflation in Ukraine is highly elevated and can be matched only with Turkey. However, in Turkey, headline inflation actually decelerated in December 2017, plunging by 1.1 p.p. to +11.9% y/y. Also, inflation in Turkey is happening against backdrop of authorities’ aggressive pro-growth bias. In the rest of the region, inflation levels 2017 ranged from +2.1% (Poland, Hungary) to +4.6% (Belarus).
150 b.p. hike is fully justified from the inflation expectations point of view. Inflation expectations were drastically up in December (see Graphs) also mimicking path of baseline inflation. Also, with 13.7% CPI inflation print it became clear that NBU has both missed 2017 target of 8%, and likely to miss 6% target for 2018.
On another hand, we stick to a point that higher UAH interest rates can be counter-productive in terms of taming inflation and the key impact on prices can only come from stronger UAH (which is not the case for now). From that perspective, NBU should stop hiking rates as soon as possible.
We believe that this hike creates opportunities for carry trade in Ukrainian hryvnia. With Ukrainian currency being traded at multi-year low, and depreciation pressure likely losing its steam, it seems to be attractive strategy to long UAH and collect ~16% interest on a reasonable short investment on 6m horizon.
|Full company name||PJSC "UkrSibbank"|
|Country of risk||Ukraine|