Protracted decline of hryvnia is accelerating inflation

Photo: Konstantin Melnitskiy

This year Ukrainians should expect a new way of consumer price growth. By the end of the year inflation may accelerate to 19.1%, according to the consensus forecast drawn by Capital. In January, inflation amounted to 3.1%, reported the State Statistics Service today.

Economists mostly fear unstable hryvnia rate and extended negotiations of the government with foreign creditors. At that, experts interviewed by Capital warn that their current forecasts could be revised as the situation in the economy changes. Furthermore, there are no grounds to speak that the decrease may be forecast.

The prices will be growing rather fast. Quarterly opinion poll of managers of companies which the National Bank of Ukraine published earlier confirms this forecast. In 2015 inflation could reach 20.5%, while in 2014 the index increased by 24.5%, according to the results of the opinion poll. Businessmen and economists explain the possible growth of consumer prices mainly by devaluation risks and also increase of expenses for the production of goods.

Manual control

NBU’s own estimates of inflation differ from those made by businesses, though not too much. The economists of the central bank expect possible growth of prices at the level of 17.2% in their most recent forecast.

Some experts agree that the government has a possibility to stabilize the situation with prices one way or the other. “In 2015 increase of administratively regulated prices and tariffs will be the key factor of inflation. At the same time influence of the currency exchange rate on inflation will be somewhat smaller than in 2014, primarily thanks to gradual stabilization of the currency market, believes analyst of UniCredit Bank Tantely Ratovohery.

In January many economists forecast inflation within 15-17% by the end of the year, expecting more moderate devaluation compared with last year.

Director of Economic Programs at Razumkov Center Vasyl Yurchyshyn says that he based his latest review of the macro forecast on the economic scenario of development of the situation on the currency market. However, latest adjustments of the NBU, which decided to abandon determination of indicative hryvnia rate at the auctions and collapse of the national currency that followed made him doubt his previous calculations. In addition to that, Head of Analytical Department at Eavex Capital Dmytro Churin noted that their preliminary forecast for inflation was also 15%, but due to the renewal of combat actions and difficulties in obtaining financing from the IMF the economic picture for 2015 may noticeably deteriorate.

Be that as it may the IMF believes that recent actions of the National Bank of Ukraine on cancellation of currency auctions and increase of the discount rate to 19.5% will have positive consequences for the stabilization of the economy. “NBU’s decision to cancel currency auctions is acceptable and must help remove presence of several exchange rates. Meanwhile the increase of discount rate of the NBU will help hold back inflation and support the national currency,” stated Director of IMF Communications Department Gerry Rice.

To hold at any price

Not only strengthening of the hryvnia can prevent inflation surge. As Ratovohery noted the measures of the government aimed at reduction of expenditures, freezing of wages and social payouts and also measures aimed at expanding the sphere of non-cash settlements will hold back the growth of cash turnover. “On the other hand, the efforts at reduction of fiscal pressure on business, development of competition on the market, bringing the economy out of the shadow, fighting corruption, shortly the whole spectrum of measures aimed at reduction of expenses of businesses and productions also favorably influence the situation with the prices,” said the analyst of UniCredit Bank.