The National Bank of Ukraine has slowed down the pace of rate cuts this year compared to 2016. The reason is visible from the graph below.

The central bank keeps a close eye on inflation as the key factor which determines whether further easing will take place or not. The upward trajectory of inflation in 2017 explains why rate cuts in the country have not been as aggressive this year as they were last year.

The central bank is targeting an inflation rate of 8% plus/minus 2% for this year and 6% plus/minus 2% for 2018. In its quarterly inflation report, last published in July, the National Bank of Ukraine had kept its inflation forecast unchanged at 9.1% for this year and 6% for the next.

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Given the relatively high rate of inflation, aggressive rate hikes in the remainder of 2017 can be ruled out. However, if the indicator remains on the expected path in 2018, the central bank may resume slashing its discount rate next year.

Ukraine has been one of the most attractive places for fixed income investors in emerging Europe, along with Russia, this year. A further cut in interest rates would increase profits for investors already invested in the country’s bonds. Investors in local currency-denominated bonds would need to watch out for its movement vis-à-vis the US dollar, though.


Alike Ukraine, inflation has been the main driving factor behind the reduction in the refinancing rate by the National Bank of the Republic of Belarus.

However, unlike Ukraine, inflation in Belarus, which fell to 4.9% in September from 5.3% in August, is already below the central bank’s target of 9% for this year.

Given the fact the central bank aims to gradually reach the inflation rate of 5% by 2020 – a target which has already been met – it opens up the possibility of further rate cuts going into 2018.


Inflation in Russia stood at 3% in September, while core inflation was down to 2.8%. Both numbers were the slowest on record. This sets a stage for further rate reductions in the country. However, the path is not as straightforward as some of its peers.

This is because there is disagreement between the central bank and the government regarding the path of monetary policy traversed until now. While the government thinks that the central bank has been slow in responding to the decline in inflation, the central bank believes that there is a greater than anticipated risk of a rise in prices, thus justifying its cautious stance.

Though another rate cut before the end of the year is quite likely, market participants would need to read closely the stance of the central bank which sees risks to inflation and intends to remain measured in its moves – both in size and scope.

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