"Drastic" word foreshadows a surprise Ukraine rate hike

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.

Modernized National Bank of Ukraine on transformation of central banking

A recent turnaround has transformed the National Bank of Ukraine from a hotel operator into a central bank. To prove its central banking credentials, the NBU is now organizing a first research conference. Titled "Transformation of Central Banking", the event features a number of high-profile speakers focusing on the hot central banking topics.

The impressive speakers' list includes Riksbank's Deputy Governor Per Jansson, professor of economics at Dartmouth College Andrew Levin, ex-Governor of the Swiss National Bank Philip Hildebrand, former Czech National Bank Governor Zdenek Tuma, and a one-time member of President Obama’s Council of Economic Advisers Maurice Obstfeld.

The NBU has made great strides towards modernizing the central bank over the past few years, and its conference is aimed at helping it find out how a central bank of the future is going to look like.

NBU Governor Valeria Gontareva, giving the conference-opening speech:

Our team has found the National Bank as a huge organization with many thousands of staff, 500 of fleet vehicles, and total of 150 thousand square meters of premises. For decades, the NBU has been overgrowing with extrinsic to central bank functions and assets. The central bank used to own university and academy, TV channel, hotels in resorts areas, hospitals and sports complexes. It performed any function but not a quality central banking.

We started the transformation project in 2014, and it is mostly completed by now. While focusing on basic central bank functions we have disposed of most of the non-core functions and assets. The National Bank is evolving towards the branchless central bank by closing the regional offices and centralizing all key functions in the NBU in Kiev. We have already closed 25 regional branches. At the same time, we’ve also massively optimized the number of staff. In 2014 we had about 12 000 employees, as of the end of 2015 this number was lesser by 55% - 5 300.

Today the National Bank of Ukraine is striving to the best global practices in the area of central banking though they are permanently changing and developing.

The conference is being organized in cooperation with the Narodowy Bank Polski, with the assistance of the Government of Canada and the Kyiv School of Economics.