The Board of the National Bank has decided to keep the key policy rate at 13%, the NBU press service reports.
This decision is aimed at ensuring the stability of the foreign exchange market and bringing inflation closer to the 5% target over the forecast horizon.
In recent months, inflation has accelerated as expected and approached 5%.
After a prolonged period of decline, inflation resumed growth in May and accelerated to 4.8% year-on-year in June. This inflationary trajectory was only slightly lower than the NBU's forecast in its April 2024 Inflation Report. Lower-than-expected food prices offset a more significant increase in electricity tariffs for households.
At the same time, core inflation (5% yoy in June) was in line with the NBU's forecast. Underlying price pressures increased due to higher business costs for labour and electricity. In addition, the weakening of the hryvnya exchange rate affected the dynamics of certain components of the core consumer price index.
Inflation will accelerate in the future, but will begin to decline next year.
Price pressures will continue in the coming months as business costs continue to rise, excise taxes increase, and the effects of last year's bumper harvest and the negative impact of the summer drought on this year's yields wear off. Preliminary estimates of inflation in July confirm its further acceleration.
At the same time, inflation will remain moderate at 8.5% by the end of the year, according to the NBU's updated forecast. This will be driven, in part, by the NBU's measures to protect hryvnya incomes and household savings from inflation and to ensure the stability of the FX market. Prices will also be restrained by the continued moratorium on increases in utility tariffs for gas, heating, and hot water.
The NBU's prudent interest rate and exchange rate policies, as well as the easing of external inflationary pressures, will help slow inflation to 6.6% in 2025. In 2026, inflation will return to the NBU's 5% target amid a gradual return to normalcy in the economy and further improvement in the energy sector.
The economic recovery will continue, although it will be limited by the impact of the war, in particular due to significant damage to the power grid.
Economic growth continued in the first half of the year, although it slowed down in recent months as a result of Russia's large-scale attacks on energy infrastructure. However, businesses have partially adapted to the persistent power outages. The stable operation of the sea corridor also provided significant support to economic activity.
Despite the electricity shortage and lower harvests compared to the previous year, the NBU even slightly improved its economic growth forecast for this year to 3.7%. This is due to the better results of the first quarter and the expected expansion of budgetary incentives, as well as the development of distributed generation, including with the support of large-scale lending programmes.
The gradual normalisation of economic conditions, the maintenance of a loose fiscal policy, along with the development of export routes and a recovery in external demand, will help accelerate real GDP growth to 4-5% in 2025-2026.
The baseline scenario of the forecast assumes that Ukraine will continue to receive significant external financing, which will, however, slowly decline as the domestic capacity to cover budget expenditures with its own resources expands. This year, international partners are expected to provide Ukraine with about USD 38 billion in soft loans and concessional loans. USD in concessional loans and grants, and at least USD 31 billion next year.
These external revenues, together with an increase in domestic borrowing, will make it possible to finance a significant budget deficit - about 23% of GDP in 2024 and 18% in 2025. For its part, the NBU will be able to maintain sufficient international reserves to ensure FX market stability and moderate inflation.
Taking into account the need to ensure the stability of the foreign exchange market and to bring inflation closer to the 5% target over the forecast horizon, the NBU Board decided to keep the key policy rate at 13%.
Despite the gradual decline in hryvnya deposit and domestic government bond rates, their yields currently protect households' hryvnya savings from inflation. In particular, the rates on these instruments exceed both the inflation rate projected by the NBU and the level of households' inflation expectations.
At the same time, the growth in households' hryvnya time deposits stopped in June. Given that a further acceleration in inflation could lead to a deterioration in expectations and a decline in the real yield on hryvnia instruments, the NBU expects to keep the key policy rate at 13%.
The NBU will also maintain an active presence on the FX market to cover the structural deficit of foreign currency, support bilateral exchange rate fluctuations, and smooth out excessive volatility. The NBU aims to ensure that the FX market remains under control of inflation expectations and achieves its inflation target over the forecast horizon.
The baseline scenario of the forecast assumes that the NBU will resume its key policy rate cuts only in early 2025.