Monetary Policy Update from the National Bank of Ukraine
Introduction
The Board of the National Bank of Ukraine has decided to maintain its key policy rate at 15.5% per annum. This decision aims to support the attractiveness of hryvnia instruments, ensure the sustainability of the FX market, and control expectations to bring inflation to the 5% target over the policy horizon.
Inflation Trends
Inflation is declining somewhat faster than forecasted, but inflation expectations remain high. In November, consumer and core inflation slowed to 9.3% year-over-year, driven by an increase in food supply due to the arrival of new harvests. Despite sustained disinflation since June, inflation expectations of economic agents remain high, and web search data indicates a further increase in households’ attention to the topic of inflation.
Future Inflation Projections
Inflation is expected to slow gradually in the coming months due to the effects of new harvests and the National Bank’s actions to maintain interest in hryvnia-denominated assets and sustainability of the FX market. Consumer inflation will continue to decelerate, though at a slower pace than in previous periods, taking into account the fading of base effects.
International Assistance and Reserves
Ukraine has received $45.8 billion in official financing since the start of the year, with an additional $5 billion expected by the end of the year. This external financing allows for maintaining an adequate level of international reserves, reinforcing the National Bank’s capacity to ensure sustainability of the FX market. International support and domestic borrowing enable the government to finance all critical budget expenditures in full.
Uncertainties and Risks
The parameters of external financing for 2026-2027 remain uncertain, with ongoing negotiations. The course of the full-scale war continues to be the key risk to inflation dynamics and economic development, posing threats to price stability and economic activity. Additional risks include the emergence of budgetary spending on defense capabilities and reconstruction, destruction of energy infrastructure, and adverse migration trends.
Monetary Policy Decision
The National Bank has decided to keep the key policy rate at 15.5% to ensure the attractiveness of hryvnia instruments, sustainability of the FX market, and control expectations to bring inflation to its 5% target. Maintaining the key policy rate at its current level supported the attractiveness of hryvnia instruments, contributing to the further increase in household investments in hryvnia term deposits and domestic government debt securities.
Future Policy Response
The National Bank will respond flexibly to further changes in the distribution of risks to price dynamics. If inflationary risks persist or intensify, the Bank will be ready to refrain from easing its interest rate policy and take additional measures if necessary. Conversely, the weakening of inflationary risks will allow the Bank to start an interest rate easing cycle in line with the baseline scenario of the October macroeconomic forecast.
Conclusion
In conclusion, the National Bank of Ukraine’s decision to maintain its key policy rate at 15.5% aims to support the country’s economic stability and bring inflation to its 5% target. The Bank will continue to monitor the situation and respond flexibly to changes in the distribution of risks to price dynamics, ensuring the sustainability of the FX market and the attractiveness of hryvnia instruments. With the ongoing war and uncertainties in external financing, the National Bank’s prudent monetary policy will play a crucial role in maintaining economic stability and supporting Ukraine’s development.
