Ukraine's National Bank raises key policy rate from 14.5% to 15.5%
The Board of the National Bank of Ukraine (NBU) announced on Thursday its decision to raise the key policy rate from 14.5% to 15.5% per annum, effective March 7, in response to rising inflation. This increase aligns with market expectations and the central bank's January forecast.
"The Board of the National Bank of Ukraine has decided to raise the key policy rate to 15.5% per annum and to adjust the operational framework parameters of its interest rate policy. These decisions aim to support the attractiveness of hryvnia savings, maintain the sustainability of the FX market, and keep inflation expectations in check, which will allow bringing back the steady disinflation trajectory toward the 5% target," the regulator stated in a press release on its website.
As a result, the overnight deposit certificate rate was also increased to 15.5%, the three-month deposit certificate rate to 18%, and the overnight refinancing loan rate to 18.5%.
The NBU noted that stronger-than-expected fundamental inflationary pressures and high pro-inflationary risks increase the threat of worsening inflation expectations and prolonged high inflation levels. Consequently, there is a heightened likelihood that the cycle of key policy rate reductions will begin later than previously projected in the January macroeconomic forecast.
"If inflationary risks continue to rise, the NBU will not hesitate to tighten its interest rate policy further," the central bank said.
In January, inflation accelerated to 12.9% year-on-year, and the NBU estimates that it continued to rise in February. The acceleration in consumer inflation has been primarily driven by temporary factors, which were anticipated and largely aligned with the central bank's forecasts. However, the regulator highlighted that fundamental inflationary pressures have intensified due to rising business costs for energy and labor, coupled with strong consumer demand. As a result, core inflation has accelerated rapidly, exceeding projected estimates, particularly in the services sector.
"Inflation will rise in the coming months due to continued effects of last year's lower harvests and increases in businesses' production costs. At the same time, measures taken by the NBU to tighten its monetary policy will rein in underlying inflationary pressures, and the arrival of new harvests in the summer will restrain the growth in food prices," the central bank projected.
The NBU expects inflation to return to a downward trajectory in the second half of the year as temporary inflationary factors subside. By the end of the year, inflation is expected to fall to single-digit levels and eventually reach the 5% target over the policy horizon.
"The course of the full-scale war remains the key risk to inflation and economic development," the press release said.
As reported, the NBU revised its inflation forecast for this year from 6.9% to 8.4% at the end of January, including an upward revision for the first quarter from 11.4% to 14.3%.
The regulator also adjusted its key policy rate forecast, expecting it to rise from 14.5% in the first quarter of 2025 to 15.4% in the second quarter before gradually declining to 14.5% and 13.1% on average in the third and fourth quarters of this year.
This latest key policy rate hike is the third since mid-December 2024. Previously, the NBU kept the rate at 13% for six months after reducing it in seven stages from 25% in July 2023.