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NBU leaves key policy rate unchanged at 25%

The NBU improved its economic growth forecast for 2023, from 0.3% to 2.0%.

NBU leaves key policy rate unchanged at 25%
Photo: NBU press service

The Board of the National Bank of Ukraine has decided to keep its key policy rate at 25% per annum. This will support the effects of previous measures to improve attractiveness of hryvnia assets, help maintain sustainability of the FX market, and form proper conditions for the continuation of steady disinflation trend and for easing the most burdensome FX restrictions. 

Inflation is declining rapidly, including thanks to the NBU's measures to support exchange rate sustainability. However, the price pressure remains high because of the war

From the start of the year, inflation has been declining faster than expected. The growth in consumer prices decelerated to 21.3% yoy in March. The decline in the inflationary pressure was facilitated by sufficient supply of food and fuel and by a rapid recovery of the energy system from consequences of Russia's terrorist attacks.

An important factor was the improvement in inflation expectations from the start of the year on the back of ceased monetary financing, stronger hryvnia exchange rate on the cash market, and improved attractiveness of hryvnia assets, at which the NBU had been targeting its measures.

However, the inflationary pressure remains high. The year-on-year decline in inflation was largely driven by the high base of last year and enhanced by the mild winter. On the other hand, businesses’ production costs remain under pressure, in particular, due to difficulties of running business and setting up logistics during the war.

Inflation will decelerate to 14.8% in 2023 and will return to a single-digit level in the next years.

Inflation will continue to decelerate, including due to lower global energy prices, restrained domestic demand, and the effect of the NBU’s monetary policy. Having considered the combined effect of the above factors and the situation in the energy sector, which was much better than expected, the NBU revised its 2023 inflation forecast, from 18.7% to 14.8%.

Easing of price pressures in the coming years will primarily be contributed by a decrease in security risks, which is the main assumption of the NBU forecast. Under such conditions, inflation expectations are forecast to improve and supply of goods is projected to increase thanks to a recovery in optimal logistical routes and production capacity. Therefore, the NBU expects inflation to decline to 9.6% in 2024 and 6% in 2025. 

In view of the rapid recovery in the energy system and the loose fiscal policy, the NBU improved its economic growth forecast for 2023, from 0.3% to 2.0%. Provided that the assumptions about the security situation materialize, no significant shortages of electricity are expected, except for some local and situational shortages that might occur in H2. At the same time, an increase in budgetary spending on the back of large volumes of international financial assistance will support economic activity and consumption. 

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