Ukraine’s National Bank Cuts Key Policy Rate to 13%

Ukraine’s central bank remains calm about inflation and the gradual decline of domestic government bonds and deposits. Russian shellings of energy infrastructure caused a higher demand for electricity and energy equipment import, but it will not severely impact inflation.

Inflation in May rose only to 3.3 percent in annual terms due to a decrease in raw food prices, according to a press release from the National Bank of Ukraine (NBU). 

This is the fourth time in the last 25 years of Ukraine's history when the raw food prices are going down. In 2012-2013 it happened due to record grain and vegetable harvest, as well as stagnation of Ukraine's economy. 

The harvest in 2022-2023 did not break the record, but the offer of raw products per person was the highest in the country's history due to the migration of 6.5 million Ukrainians abroad, according to the NBU's May Inflation report. 

Apart from harvest results, inflation remains low thanks to favorable weather conditions, and some producers reorienting toward the domestic market, the NBU stated. 

Businesses' expenses on wages and electricity is spurring some growth in consumer prices index components. 

Electricity imports will cost Ukraine $800 million this year, according to the National Bank’s estimates. 

“If we talk about imports, in April we imported 0.3 GW, in May – 0.6 GW. These sums are not significant enough to impact seriously on the currency market,” deputy Chairman of the National Bank of Ukraine Serhii Nikolaychuk told journalists during a briefing on monetary policy on June 13.

Nikolaychuk also said that Ukraine might have more electricity deficit in June, probably due to warmer weather and planned repairs at nuclear power plants.

“This problem should be partly compensated in the coming months by the expansion of the authorization of the European Network of Transmission System Operators (ENTSO-E) for the transmission of electricity on a commercial basis,” Nikolaychuk added.

For now, the central bank is not alarmed because of expenses companies have for energy equipment purchases. 

“We will draw more conclusions when we prepare the July Monetary Review,” the Head of the National Bank of Ukraine Anrii Pyshnyy said. 

The moratorium on public utility tariffs will also remain, curbing price growth. 

The key rate will remain at 13 percent per annum until the end of 2024, according to the National Bank's forecast. 

A decrease in the key rate is also followed by a gradual decline in nominal rates of hryvnia deposits and domestic government debt securities. But the demand for them remains high and they are still attractive for savings. 

Debt securities rollover – an indicator for reinvesting funds from a mature security into a new issue of the same or similar security – came to be 132 percent. 

Meanwhile, deposits with a maturity of three months or more continued to exceed the growth of both short-term hryvnia and term FX deposits, according to NBU's observations. 

This will not mean lower key rate will make less demand for savings instrument, according to NBU. 

In the second quarter, inflation will accelerate, but NBU will “return it to its target range of 5% ± 1 pp in the coming years.” 

The central bank also hopes that lower key policy rate will make interest rates for business loans lower, but for now, this is not the only tool that might enable interest rates to decrease.