The NBU raises the key policy rate to 13.5%

The NBU Board has decided to raise the key policy rate to 13.5% per annum. This decision is aimed at maintaining the stability of the foreign exchange market, keeping inflation expectations under control, and gradually slowing inflation to the 5% target.

In recent months, inflation has been growing faster than the NBU's forecast

In November, inflation accelerated to 11.2% year-on-year. On the one hand, the effects of a tight food supply due to this year's poor harvest remained a significant driver of price growth. The impact of this factor on inflation is expected to level off next year as the new harvest arrives. On the other hand, the inflationary surge is increasingly gaining fundamental features, as evidenced by the further acceleration of core inflation (to 9.3% yoy in November). The latter is due, in particular, to higher production costs, including electricity and labor, as well as exchange rate effects due to the hryvnia's depreciation in previous periods. Inflation expectations are currently relatively stable, but the risk of an imbalance is growing as households become more attentive to inflationary processes.

Inflation is expected to decelerate in 2025 and continue to move toward the 5% target.

In the coming months, inflation is likely to continue to rise in annual terms due to the continued influence of food supply factors, substantial budget expenditures, strong wage growth, and higher energy shortages during the heating season. However, inflation should slow further amid a gradual improvement in the energy sector and higher harvests. This will also be supported by the NBU's monetary policy measures and the expected easing of external price pressures.

The volume of international financial assistance in 2025 will be sufficient to finance the budget deficit without issuing new debt and to maintain a stable FX market.

In recent months, the risks of a shortage of international financing in 2025 have decreased significantly due to progress in the implementation of the Ukraine Loan Cooperation Mechanism (ULCM), which provides a non-repayable form of macro-financial assistance, as well as the disbursement of funds under the Extraordinary Revenue Acceleration (ERA) Loans for Ukraine program. Accordingly, the NBU's forecast of international assistance in the amount of over USD 38 billion next year remains valid. The NBU's forecast of over USD 38 billion in international aid next year remains valid. This funding will, in particular, allow the NBU to maintain an adequate level of international reserves to ensure the stability of the foreign exchange market.

A full-scale war remains a key risk to inflation and economic development

The war continues. Russian aggression poses risks of further decline in economic potential, in particular due to the loss of people, territory, and production facilities. The speed of the economy's return to normal conditions will depend on the nature and duration of hostilities.

The main risks caused by the Russian aggression remain unchanged:

• additional budgetary needs, primarily to maintain defense capabilities;
• possible additional tax increases, which, depending on the parameters, may increase price pressure;
• further damage to infrastructure, especially energy and port infrastructure, which will limit economic activity and put pressure on prices from the supply side;
• deepening of negative migration trends and further expansion of the labor shortage in the domestic labor market.

However, positive scenarios may also materialize, including further acceleration of European integration processes and restoration work in the energy sector.

In order to maintain the stability of the FX market, prevent an imbalance in expectations, and gradually bring inflation back to its target, the NBU Board decided to raise the key policy rate by 0.5 pp to 13.5%.

The NBU sees the need to tighten its interest rate policy to reverse the inflation trend and bring inflation to the 5% target on the policy horizon. The key policy rate hike will help keep inflation expectations under control and support real yields on hryvnia instruments. This will spur interest in hryvnia term savings, and thus help reduce pressure on the exchange rate and prices as temporary inflationary drivers fade.

Maintaining the stability of the FX market will remain an important factor in bringing inflation back on a downward trajectory. Given the sufficient amount of international assistance, the NBU's ability to compensate for the structural shortage of foreign currency in the private sector and smooth out excessive exchange rate fluctuations will remain strong.

The NBU will continue to tighten its interest rate policy at upcoming meetings of the Monetary Policy Board if signs of persistent inflationary pressures and the threat of an imbalance in inflation expectations persist.

The increase in the key policy rate to 13.5% per annum was approved by the NBU Board's decision No. 430-рш "On the Key Policy Rate" dated December 12, 2024, which comes into force on December 13, 2024.

A summary of the discussion by Monetary Policy Committee members that preceded the NBU Board's decision will be published on December 23, 2024.

The next meeting of the NBU Board on monetary policy will be held on January 23, 2025, in accordance with the approved and published schedule.