Ukraine Central Bank Increases Key Rate by 1% as Inflation Reaches Double-Digits

Ukraine’s central bank, the National Bank of Ukraine (NBU), increased the key interest rate from 13,5% to 14,5%, raising concerns after inflation spiked above the forecast. 

NBU announced the decision at a monetary briefing on Thursday. 

In the summer last year, the central bank forecasted inflation to be no more than 10%, but it overlapped forecasts starting from autumn 2024. 

“In December 2024, inflation accelerated to 12% year-on-year, exceeding the NBU’s previous forecast. According to the bank’s estimates, inflation continued to rise in January,” the central bank press release wrote.

Weaker harvests have currently been the key contributor to the inflation hike, but NBU’s latest estimates showed core inflation accelerated because of a sharp rise in service costs. 

“Such price dynamics were driven by businesses’ higher expenses on raw inputs, materials, and electricity, as well as by wage increases against the backdrop of persisting staff shortages,” NBU wrote. 

Inflation will peak in the second quarter and is unlikely to reach NBU’s target earlier than 2026. 

It will stay at two-digits during three quarters of 2025, peaking at 14.3% and decreasing to 8.4% by the end of the year, according to the latest forecast. 

The key rate will track the rise, increasing to 15,4% in the second quarter and decreasing to 13,1% at the end of 2025. 

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Apart from grim news about inflation, Ukraine’s GDP also grew less than the central bank expected 3.4% of real GDP in 2024. 

Apart from smaller harvests and lower demand, GDP grew less due to the ongoing war in Ukraine particularly increased air attacks, which resulted in electricity shortages. 

In 2024, Ukraine received $42 billion in international aid in the form of loans and grants and is expecting to get $38.4 billion in aid this year. These funds should be enough to cover the budget deficit caused by Russia’s invasion and help to stabilize inflation.

Even so, the central bank governor Andrii Pyshny expressed concern that “international assistance will become less regular” because of increases in geopolitical polarization. 

Two days before NBU announced its decision, Trump suspended all US foreign assistance programs for 90 days to determine whether they align with the new administration’s policy goals.