Understanding Inflation Trends: ICU Weekly Insight on Central Bank Expectations
In a recent report by the Ministry of Finance (MoF) in Ukraine, it was revealed that net domestic borrowings reached UAH236bn in 2024. This news comes after the MoF refinanced all FX-denominated redemptions while borrowing in hryvnia significantly more than it repaid. The budget for this year envisions tiny net borrowings, a stark contrast to the borrowing habits of the previous year. Join us on Telegram to follow our coverage of the war at @Kyivpost_official.
Net Borrowings and Refinancing Ratios
The total refinancing ratio for the MoF in 2024 was 162%, with hryvnia instruments at 193% and hard currency at 104%. Despite net borrowings standing at UAH236bn, it was UAH122bn less than budgeted. Looking ahead to this year, the MoF is expected to redeem about UAH490bn worth of domestic bonds, with significant redemptions scheduled for October, March, and April.
Demand for Bonds and Eurobond Rally
Last week, the MoF saw low demand for military bills but a high oversubscription for a new four-year paper. This trend reflects a shift in banks’ interest towards certain types of bonds. Meanwhile, prices of Ukrainian Eurobonds declined due to pessimism about the war’s duration, causing spreads to widen and prices to fall.
FX Market and NBU Reserves
The FX market remains under demand pressure, with the NBU having to spend reserves to stabilize the hryvnia. Despite record high inflows of foreign financial aid in December, the NBU’s international reserves were slightly below estimates due to high sale interventions in the FX market. Looking ahead, the NBU is expected to maintain reserves in the range of US$40-45bn over the year.
In conclusion, understanding inflation trends is crucial for policymakers and investors alike. Inflation in Ukraine exceeded expectations in December, driven by food prices and other consumer-basket components. While inflationary pressures may persist in the short term, there is hope for a deceleration in the latter half of the year as new harvests normalize food prices. The NBU’s key policy rate is also expected to increase, depending on CPI prints for January and February.
As we navigate these economic trends, it is essential to stay informed and prepared for potential shifts in borrowing, bond demands, and currency fluctuations. Stay tuned for more updates on Central Bank expectations and inflation trends in the coming weeks.
