The National Bank kept the key policy rate at 13%

The NBU Board has decided to keep the key policy rate at 13%. 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 long period of decline, inflation resumed growth in May and accelerated to 4.8% year-on-year in June. This inflationary trajectory was only slightly below 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 labor and electricity. In addition, the weakening of the hryvnia 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 harvests and the negative impact of the summer drought on this year's yields are exhausted. 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 facilitated, in particular, by the NBU's measures to protect hryvnia incomes and household savings from inflation and to ensure the stability of the foreign exchange 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 normalization of the economy and further improvement in the energy sector.

Economic recovery will continue, although it will be limited due to the impact of the war, in particular due to significant damage to the energy system

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 programs.

The gradual normalization of economic conditions, the maintenance of a loose fiscal policy, along with the development of export routes and a revival in external demand, will help accelerate real GDP growth to 4-5% in 2025-2026.

Significant international financial support will allow the government to finance the budget deficit and the NBU to maintain a comfortable level of reserves.

The baseline scenario of the forecast assumes that Ukraine will continue to receive significant external financing, which, however, will 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 $38 billion in soft loans and concessional credits. USD in concessional loans and grants, and at least USD 31 billion next year. THE AMOUNT OF FOREIGN AID WILL BE AT LEAST 31 BILLION US DOLLARS.

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.

The key risk to inflationary dynamics and economic development remains a full-scale war

The duration and nature of Russia's aggression will continue to have a significant impact on inflationary processes and economic development in Ukraine. A prolonged, high-intensity war will make it impossible for the economy to return to normal operating conditions and will make it difficult to bring inflation to the NBU's target.

Other risks also remain, most of which are also directly or indirectly related to the course of the war, including

• additional budgetary needs, primarily to maintain defense capabilities;
• transfer to prices of certain new taxes for business, the introduction of which is currently being discussed at the state level;
• further damage to infrastructure, especially energy and port infrastructure, which will limit economic activity and put pressure on prices from the supply side;
• deepening negative migration trends.

There is also a risk that international partners will significantly reduce their support for Ukraine, in particular as a result of electoral cycles in many countries.

At the same time, a number of positive scenarios are likely to materialize, including further expansion of export opportunities, acceleration of European integration processes, implementation of a large-scale recovery program for Ukraine, and faster recovery in the energy sector.

In addition, the practical implementation of the Extraordinary Revenue Acceleration Loans (ERA) mechanism, secured by future revenues from immobilized Russian assets, could provide Ukraine with additional financial resources starting in 2025. This will reduce the risks to the timely and rhythmic flow of international financing.

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 interest rates on hryvnia deposits and domestic government bonds, their yields currently protect households' hryvnia 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' hryvnia 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 in the foreign exchange 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 that the NBU 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. However, the NBU will respond flexibly to changes in the balance of risks to inflation and the FX market

If the risks to inflation and the FX market ease, in particular as a result of Ukraine's potential receipt of more financial support, the NBU will consider resuming the key policy rate cut cycle more quickly. At the same time, the NBU will be ready to tighten its monetary policy if price pressures increase significantly and risks of an imbalance in expectations arise.

The NBU Board's decision No. 272-рш "On the Key Policy Rate" dated July 25, 2024, which comes into force on July 26, 2024, approved the key policy rate at 13% per annum.

A summary of the discussion of the Monetary Policy Committee members that preceded the NBU Board's decision will be published on August 05, 2024.

The next meeting of the NBU Board on monetary policy will be held on September 19, 2024, in accordance with the approved and published schedule.