Key Policy Rate Holds at 13% as Inflation Increases

Ukraine’s central bank, the National Bank of Ukraine (NBU), kept the key policy rate at 13 percent as inflation started increasing from May and reached 4.8 percent year-over-year in June 2024.

Pressure on prices was due to an increase in household electricity tariffs – a decision imposed by Ukraine’s government in June 2024 that provoked a 64 percent hike in tariffs. However, increases in food prices remain lower than the central bank expected. 

“Price pressures will persist in the coming months, fueled by further increases in business costs, higher excise taxes, the fading effects of last year’s large harvests, and the adverse impact of the summer drought on this year’s crop yields,” the head of the NBU Andrii Pyshny reported during the briefing.

The NBU’s decision is backed by an updated forecast: inflation is expected to rise to 7.9 percent in the third quarter and to 8.5 percent by the end of 2024. The peak is expected at 9.7 percent in the first quarter of 2025, decreasing to 6.6 percent by the end of the next year. 

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The central bank noted a gradual decline in hryvnia deposit rates and interest rates on domestic government debt securities.

“At the same time, household hryvnia term deposits stopped growing in June. Given that a further acceleration of inflation could worsen expectations and decrease the real yields on hryvnia instruments, it is advisable to keep the key policy rate at 13 percent,” Pyshny said. 

Unexpecting defense spending, further damage to energy and port infrastructure, and Ukraine’s refugees not returning home remain the top risks to economic stability. 

What’s new is a recent Ministry of Finance initiative to raise taxes to finance an extra Hr.500 billion ($12.5 billion) needed for defense in 2024. The proposed bill raises military tax for individuals, private entrepreneurs (so-called FOP), and enterprises, and is expected to be voted on in Ukraine’s parliament in August.

This may create a pass-through from business costs to consumer prices, though it may also be absorbed with decreasing profitability for businesses, Deputy NBU Head Serhii Nikolaichuk explained during the briefing. 

“There is also a risk that international partners will reduce their support for Ukraine more significantly, in particular, due to the effects of the election cycles in many countries,” Pyshny said.

Economic growth worsened but stabilized

The first quarter of 2025 is when the NBU is expected to lower the interest rate to 12.6 percent, according to the central bank’s forecast – despite the peak of inflation acceleration.

“According to our baseline scenario for the first quarter, we expect to see the situation as stable enough to return to the monetary easing cycle,” Nikolaichuk clarified during the briefing in response to a question from Kyiv Post. 

Ukraine’s economic growth worsened at the beginning of summer due to Russian strikes on energy-generating facilities. 

However, “the NBU has even slightly upgraded its economic growth forecast for this year, to 3.7 percent,” the central bank statement said.

The more positive growth forecast is anchored in three factors: 

• bank’s energy lending program to boost decentralized energy
• expansion of fiscal stimulus – more taxes to the budget
• and a 6.5 percent GDP growth rate in the first quarter according to Ukraine’s state statistics – higher than any other conclusions among Ukraine’s state and private analysts.

Real GDP growth is even expected to reach 4 to 5 percent in 2025–2026, NBU said.