NBU hikes key policy rate to 10%, worsens macro outlook

21 January 2022

The National Bank of Ukraine (NBU) announced on Jan. 20 that it decided to hike its key policy rate by 1pp to 10.0%. A number of inflationary risks came into effect, and this calls for a tighter monetary policy in order to improve the inflationary expectations and bring inflation down to the target of 5.0%.


In December, consumer inflation slowed to 10.0% yoy from its peak in September of 11.0% yoy. At the end of the year, inflation slowed down due to a record high crop harvest, the correction of some global food prices, appreciation of the national currency and the worn-off effect of a low comparative base. At the same time, the inflation slowdown  was hindered by the further growth of world prices for energy, increased production costs and high consumer demand.


The NBU has revised its forecast for consumer inflation to 7.7% from 5.0% YTD in December 2022. In particular, the prices for energy resources will remain high longer than it was expected earlier. This will put pressure on production costs and will call for the hike of utility tariffs. High demand for labor will result in faster growth of wages, which will stimulate consumption.


Ukraine’s GDP increased around 3.0% yoy in 2021, according to NBU estimates. The renewal of the economy was fostered by stable consumer demand, the post-crisis increase of investments and a record-high crop harvest. At the same time, the fast growth of prices for energy and slow renewal of service sectors are among the factors which prevented a faster economic revival. The NBU expects Ukraine’s economy to grow 3.4% yoy in 2022 (vs. 3.8% yoy expected in its October forecast). In 2023-2024, it will grow around 4% yoy.


IMF cooperation is a major assumption of the central bank’s forecast. Continuing cooperation is critical during this period with its negative information background formed by the tense geopolitical situation. The major risks to the macroeconomic forecast include the escalation of military conflict with Russia and a longer-than-expected surge of global commodity prices.


The NBU stated that it will continue the monetary tightening cycle. Moderately tight monetary conditions are expected through the whole of the NBU's forecast horizon of 2022-2024.


Evgeniya Akhtyrko: The NBU's decision was in line with our expectations. The current downward inflation trend is not impressive while geopolitical risks are at peak compared to the last several years. We don't expect to see a confident downward trend of consumer inflation in January-February, and another hike of the NBU's key policy rate is likely.

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