The National Bank of Ukraine used unusually “drastic” language in a comment on higher than expected inflation earlier this month, which — in hindsight — foreshadowed a second consecutive interest rate hike that caught the markets by surprise.
Two sentences were marked in bold in the NBU’s regular monthly comment on inflation released on December 11, three days before the rate-setting meeting:
The actual inflation came in higher than was forecasted in the October 2017 Inflation Report as food prices were rising at a faster rate.
The current trend of the CPI and its components is higher than the forecast published in the October 2017 Inflation Report showing a more drastic deviation, than expected, of inflation from its target by the end of 2017.
To me, the “drastic” word was the clearest possible signal that the NBU is readying to tighten policy further following its October rate hike, the first since March 2015. Central banks rarely use such strong language in official communications, unless they truly want to make their point.
As it turned out, Ukraine policymakers delivered on the pledge to act to bring inflation back to their target on December 14, hiking the key policy rate to 14.5%.
Seems like markets in Kiev have yet to learn to digest and properly interpret the NBU’s policy signalling. To catch even the smallest, but still useful, nuances, it may be worth paying extra attention to the central bank’s English pronouncements.