Ukraine’s central bank keeps key policy rate at 25%, forecasts economic growth, eased inflation

The National Bank of Ukraine (NBU) has decided to keep its key policy rate at 25 percent per annum, it announced on Thursday.

Ukraine’s central bank believes that the steady key policy rate will support the effects of its previous measures to increase the attractiveness of hryvnia assets.

It is expected to further ensure the stability of the foreign exchange market and form proper conditions for the continuation of the steady disinflation trend and for easing the most burdensome FX restrictions.

"Taking into account the risks…, high uncertainty, and a significant amount of expected budget expenditures, maintaining exchange rate sustainability amid a pursuit of currency liberalisation plans will require the NBU to continue to take a monetary policy approach that makes hryvnia-denominated savings highly attractive," the NBU said in a statement.

"At the same time, the improved macroeconomic situation, including a deeper decline in inflation and the accumulation of a comfortable amount of international reserves, is creating prerequisites for revising the key policy rate forecast," it added.

The updated macro forecast envisages the launch of a cycle of key policy rate cuts in Q4 2023.

Inflation

Ukraine’s central bank notes that Inflation has been "declining faster than expected", in part due to the NBU's measures to maintain exchange rate stability. However, price pressures remain high due to the impact of the war.

"The year-on-year decline in inflation was largely driven by the high base of last year and enhanced by the mild winter. On the other hand, businesses’ production costs remain under pressure, in particular, due to difficulties of running business and setting up logistics during the war," the statement read.

According to the NBU, inflation will continue to decelerate, including due to lower global energy prices, restrained domestic demand, and the effect of the central bank’s monetary policy. It revised its 2023 inflation forecast from 18.7 percent to 14.8 percent.

The easing of price pressures in the coming years, the central bank believes, will primarily be contributed by a decrease in security risks, "which is the main assumption of the NBU forecast."

"Under such conditions, inflation expectations are forecast to improve and supply of goods is projected to increase thanks to a recovery in optimal logistical routes and production capacity.

"Therefore, the NBU expects inflation to decline to 9.6 percent in 2024 and 6 percent in 2025," it said in a statement.

Economy

Ukraine’s central bank reaffirmed its forecast of economic growth "already this year", which "will accelerate in the coming years on the back of a decrease in security risks assumed by the forecast".

"In view of the rapid recovery in the energy system and the loose fiscal policy, the NBU improved its economic growth forecast for 2023, from 0.3 percent to 2.0 percent," the statement read.

Should security risks subside starting next year, as assumed by the NBU’s baseline scenario, the economic growth will rise to 4.3 percent in 2024 and 6.4 percent in 2025.

"The de-occupation of territories and complete unblocking of Black Sea ports will enable a gradual increase in industrial production and crop harvests," it notes.

"Moreover, domestic demand is expected to increase thanks to the return of some of [the] displaced persons."