May 12, 2015

Ukraines CPI spiked to 60.9% y/y in Apr (from 45.8% y/y in Mar), Ukrstat reported last week

Following a 10.8% m/m rise in Mar, last month prices grew by 14.0% vs. the preceding month record growth since Sep 1995.

A one-off hike in administratively regulated utility tariffs (agreed with IMF) is the principal CPI driver in Apr.While accounting for 11% of the CPI basket, the tariffs on average doubled vs. Mar 2015. Gas prices for households were raised by the stunning 453.4% and electricity prices were up by 33.6%. (Prices for other utility services were nearly unchanged).

We believe consumer inflation has reached its peak and retain our end-2015 CPI projection at 40%, since we think that monthly inflation rates will drop sharply in the coming months.

Real wages keep falling and the overall consumer mood stays low, there are absolutely no demand-driven inflation drivers. Economy has seen the sharp contraction in domestic demand and the prospects of recovery are highly uncertain.
  Most of the energy / utility tariffs have been adjusted. Electricity prices are the only notable exception as they are scheduled to rise by roughly 25% since Sep 1 this year.
  Devaluation pressure has generally fallen down and the situation on the FX market appears to be getting under control. Current account (ex gas) has generally balanced and the black market shows signs of stabilization as well.
  Some retailers have already priced in another 30-50% devaluation from the current level. Coupled with the knocked down retail demand, this suggests a further spell of devaluation (if any) should have a limited impact on consumer prices. PPI has now turned lower than CPI. Other things equal, this fact alone should also contribute to a lower pressure on the retail prices.

No monetary easing through the coming months. With NBU main policy rate at 30%, real interest rates are already deep negative. Bringing the CPI to below 10% in 2016 (as required in the IMF program) now appears to be rather challenging, in our view. We therefore expect the central bank policy to stay tight for the rest of the year, with no monetary easing expected any soon.

For more information: 12.05.2015.pdf