Pandemic slightly restrains consumer demand growth – NBU

Given strong retail performance, the pandemic insignificantly restrains the growth of consumer demand.

Members of the Monetary Policy Committee (MPC) of the National Bank of Ukraine said this during a key policy rate discussion, the NBU’s press service reported.

A potential change in the discount rate in January cannot offset the effects of last year’s poor harvest, pass-through of a weaker hryvnia, higher energy prices, and increases in certain tariffs. The impact of these factors will mostly fade in H2 2021, with or without a monetary policy response. 

Meanwhile, fundamental inflationary pressures have been mounting. Real household incomes continue to grow, driven by more social spending and higher wages, including the minimum wage. Complicated border-crossing rules limit international tourism, enticing the public to spend more money within the country. In addition, remittances from abroad continue to be high. Judging by strong retail performance, the pandemic is not putting much of a drag on the surge in consumer demand.

In December 2020, most respondents also reported worsened inflation expectations. Households are usually guided by emotion as they adapt their expectations to current conditions, meaning that this spike in expectations could be only temporary. More specifically, the negative reaction may be due to higher prices for consumer goods and higher utility bills.

The speedy recovery in the global economy and massive stimulus programs in developed countries are keeping prices high in commodity markets. Inflationary pressures from Ukraine’s major trading partners also are growing as business activity and depreciation effects in some of these countries intensify.

However, investor optimism amid overly loose monetary conditions and the start of a global push to vaccinate against the coronavirus has already led to significant capital inflows into EMs. Portfolio investment inflows into Ukraine also have resumed. This creates conditions that may ease inflationary pressures through the exchange rate channel.

As Ukrinform reported, on January 21, 2021, the National Bank of Ukraine decided not to change the discount rate and leave it at 6%.

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