On Thursday, 21 January, the Board of the National Bank decided to keep the interest rate unchanged at 6% per annum. The regulator estimates that inflation accelerated to only 5% in 2020 and reached the centre of the target range, but inflation will increase in the second half of 2021. Independent experts don’t think so.
The National Bank website notes that during the past year, inflation was mostly below the target range of 5% ± 1. Falling world energy prices, as well as declining demand for non-priority goods and services, have kept prices down during the pandemic. At the same time, as expected, inflation accelerated at the end of the year. This is due to the dynamic recovery of the world economy, the further expansion of domestic consumer demand, and the increase in energy and individual food prices. As a result, inflation got back to the target range in December.
According to the National Bank, inflation will accelerate in the first half of 2021, but will return to the target range of 5% ± 1 in the first half of 2022. The National Bank has revised the inflation forecast for 2021 in the direction of increase from 6.5% to 7%. The inflation acceleration in the first half of the year will be determined by rapid consumer demand, higher energy prices and worse crop yields of last year. Besides, business production costs, particularly for wages, will increase. The rate of increase in administratively regulated prices will remain high due to higher excise duties on tobacco products and higher electricity prices.
According to the regulator’s experts, the influence of inflationary factors will be reduced in the future, and inflation dynamics will be reversed. By increasing the supply of new crops, food inflation will slow down, and the effect of a bad comparison for individual goods will be exhausted at the end of the year. The National Bank’s monetary policy will also seek to ease the fundamental pressure on prices from sustained consumer demand and to improve inflationary expectations. As a result, at the end of 2021 core inflation is expected to reach 5.9%, and in the first half of the following year overall inflation will return to the target range. In 2022-2023, inflation will be about the medium-term goal of 5%.
The National Bank estimates that in 2020 the real gross domestic product (GDP) fell by 4.4%, which is less than expected in the previous forecast (6%). Ukraine’s economy recovered quite rapidly in the second half of the year. After the tough phase of the quarantine, the fall in GDP slowed to 3.5% in the 3rd quarter, and this trend persisted in the 4th quarter. The strengthening quarantine restrictions in November had slight impact on business activity.
The growth of domestic consumption led to a rapid economic recovery. The increase in income and expenditure from the budget maintains consumption high. Thus, retail trade continued to grow rapidly in the 4th quarter. The dynamics of GDP have been improved by the increase in current budget expenditure on infrastructure, particularly road repairs, and also health care. However, business investment activity did not increase.
In 2021, the losses from the crisis due to the coronavirus will be almost made up – Ukraine’s GDP will grow by 4.2% and will continue to grow at a rapid rate of about 4% in 2022-2023. Sustained consumer demand, driven by further increase in real incomes, will remain the main engine. Reducing uncertainty about the development of the pandemic will promote recovery of investment activity.
According to the National Bank, the current account of the payment balance, after a significant surplus last year, will return to deficit in 2021-2023. The current account surplus in 2020 is expected to reach one of the highest levels in Ukraine’s history – 4.8% of GDP. However, the current account of the payment balance will rerun to deficit in 2021-2023.
The terms of trade will deteriorate if energy prices rise, despite the fact that prices and external demand for the main goods of Ukrainian exports will remain fairly high. The gradual increase in investment imports will also lead to economic recovery. According to the website of the National Bank of Ukraine, the growth of consumer imports, taking into account the expected increase of citizens’ income will be sustainable in the future.
As it was already written in UA-Times, experts disagree with the opinion of civil servants regarding positive prospects of the economy of Ukraine for the following year. The Candidate of Economics, independent expert Oleksandr Khmelevskyi considers that the inflation of 2020 was more than 5% and its further growth should be expected.
“Government forecasts inflation at 7.3% for 2021, and the National Bank at 6.5%,” says Khmelevskyi. – Perhaps one year later we will be informed that these figures have been met. But in fact, inflation will be much higher. An increase in utility tariffs after quarantine has already been announced. The devaluation of the hryvnia will accelerate. The pandemic and the economic crisis will continue. The government will not collect the revenues planned in the State Budget and will have to resort to much larger borrowings than planned. At the same time, the National Bank will increase the volume of money supply. Therefore, in 2021, real inflation will be at least 20%.”
Translation: Evelina Susyk