Central Bank Keeps Key Rate to Stave Off Inflation

Kyiv’s key lending rate will stay at 13% and inflation in Ukraine is under control, according to the analysis and decision announced by Ukraine’s central bank, the National Bank of Ukraine (NBU).

NBU increased its forecast for inflation in the next few quarters and warned about strengthening of pro-inflation risks – the growth in both consumer and core inflation was faster than forecast.

“Given that inflation has not yet peaked, and that pro-inflationary risks have even increased for the coming months, the NBU believes it appropriate to remain cautious while conducting its interest rate policy, and to take prudent measures to safeguard the sustainability of the FX market,” the central bank chair Andriy Pyshnyy said during the monetary briefing on Thursday, Oct. 31.

Year-to-year inflation accelerated to 8.6% in September and kept on rising in October, according to NBU. The central bank expected this acceleration, but the figures were renewed in the new macroeconomic forecast.

Inflation is expected to reach 9.7% in the fourth quarter of 2024, with its peak at 11.4% in the first quarter of 2025. It will remain double-digit, 10%, in the second quarter of 2025 and then decrease to 8.2% and 6.9% in the third and fourth quarters respectively.

As a safety measure, the central bank decided to keep the 13% key rate for longer than expected – at least until the summer of 2025.

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Central Bank Raises Key Rate to Tame Inflation Rise

Inflation increased above the central bank’s maximum forecast, forcing monetary governors to lower the heat by raising the key rate by half a percent– but it should decelerate in 2025.

“It does not mean that we have no opportunities for earlier key rate decrease, but we plan to [delay any decision until] Monetary Policy Committee meetings in the future. There are factors that can bring down inflation pressure in the future months,” first deputy central bank chair Serhii Nikolaichuk explained, answering a Kyiv Post question during the briefing.

The reasons for higher inflation are smaller-than-expected harvests of various crops that increase the food prices and accelerated growth in the cost of food industry production.

“The rise in inflation was also driven by further increases in production costs, including the costs of electricity and labor, as well as by exchange rate effects from the weakening of the hryvnia in previous periods,” the central bank chair said during the monetary briefing.

The financial aid from the West became more stable and predictable which helped Ukraine to sign with relief about the volumes of central bank reserves. “The projections for these reserves have been revised upward compared to the July forecast – to $43.6 billion for 2024, and to $41.0 billion for 2025,” the central bank’s press release said.

In October, the International Monetary Fund (IMF) disbursed another tranche to Ukraine in the amount of $1.1 billion because of the fifth review of the Extended Fund Facility (EFF). Canada also provided $300 million of concessional financing.

“Ukraine is expected to receive more than $15 billion, of which $4.8 billion under the World Bank’s SPUR program supported by financing from the United States,” the press release wrote.

Ukraine is also close to securing a non-repayable loan secured by proceeds from frozen Russian assets, to the total amount of $50 billion as part of the Extraordinary Revenue Acceleration (ERA) Loans.

This helped to improve forecasts for international financing, which is expected to reach $41.5 billion this year and $38.4 billion next year.

“Every time we talk with our partners, we emphasize that the international financial aid should not only be in the promised volumes, but also be on time,” Pyshnyy said.

The NBU also suspended its interest rate policy easing cycle and will not decrease the interest rate for deposit certificates and refinancing loans.

Ukraine’s central banks also outlined risks for the future that may accelerate inflation:

• possible additional budget needs, mainly those to maintain defense capabilities 
• possible additional hike in taxes, depending on its parameters 
• further damage to infrastructure, especially energy and port infrastructure, which will restrain economic activity and put supply-side pressures on prices
• a deepening of adverse migration trends and a further widening of labor shortages on the domestic labor market.