Ukraine’s central bank, the National Bank of Ukraine (NBU), increased the key policy rate from 13% to 13.5% to tame inflation that rose above its forecast. The higher key rate should lower inflation expectations and sustain the will of Ukrainians to keep savings in the national currency rather than purchasing dollars.
The National Bank announced its decision on Thursday.
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In November, the central bank forecast inflation no more than 9.7% year-over-year (yoy) until the end of 2024, but it actually accelerated faster than the forecast – to 11.2% yoy, as the NBU wrote in its latest press release.
The increase in inflation was caused by:
- drought during summer 2024 in Ukraine caused weaker harvests and thus, limited food supply
- increases in the costs of electricity and wages that push further growth in core inflation (up to 9.3% yoy in November)
- exchange rate effects from the weakening of the hryvnia in previous periods.
The central bank does not observe any panic on the market, stating: “Inflation expectations are relatively stable as of now, but the risk that they might unanchor is increasing as households pay more attention to the inflation processes.”
Which corresponds to the central bank’s data: It previously expected that inflation’s peak would be 11.4% in January 2025, slowing down after reaching its climax. But the climax indicator has already been reached.
However, the NBU still believes inflation will slow in 2025.
“Inflation should decelerate as the situation in the energy sector improves and harvests increase. This will also be facilitated by the NBU’s monetary policy measures and an expected easing of external price pressures,” the central bank press release wrote.
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Another factor encouraging calm about 2025 should be a stable plan of international aid to Ukraine – next year the country is scheduled to receive $38 billion of financing from partners, including from Extraordinary Revenue Acceleration (ERA) Loan for Ukraine.
The key risk for Ukraine’s central bank remains the same – Russia’s full-scale invasion – which “poses the risk of a further reduction in economic potential, in particular, due to the loss of people, territories, and production facilities.”
When Russia starting its full-scale war against Ukraine, Ukraine’s economy had already lost 30% of its economic output and 3.5 million jobs, as Ukraine’s prime minister Denys Shmyhal previously said in an interview with Japanese channel NHK.
The World Bank estimated that as of Dec. 31, 2023 the total cost of reconstruction and recovery in Ukraine is $486 billion over the next decade, according to Rapid Damage and Needs Assessment (RDNA3).
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