The National Bank of Ukraine also stated that it might raise the key interest rate again later this year. The key interest rate is now at eight percent.
Despite soaring inflation, the National Bank of Ukraine, NBU, refused to increase the country’s key interest rate to battle inflation until now. However, that changed yesterday when the NBU board decided to raise the key interest rate from 7.5 percent to 8 percent.
In a statement, the National Bank of Ukraine said that it is increasing the key interest rate due to “underlying inflationary pressures” and to keep inflation in check at this point to reach the goal of 5 percent inflation in 2022. Inflation has been soaring in Ukraine recently to around 9.5 percent, which is higher than expected and third highest in Europe – only after Turkey and Belarus, according to numbers from Tradingeconomics.
NBU says that the increased inflation is due to increased food and energy prices globally, which is making everything more expensive for consumers. It comes after higher demand worldwide and rising production costs – partly due to higher wages, the bank says.
“Inflation will soon rise to slightly above 10%, but it will weaken at the end of 2021 and return to its 5% target in H2 2022. With global prices surging and demand recovering further, the NBU has revised its 2021 inflation forecast from 8% to 9.6%. After peaking in the fall of this year, inflation will begin to slow as the new harvest arrives and global energy prices adjust,” the bank writes in a statement on its website.
The National Bank of Ukraine’s central interest rate over the years:
Ukraine’s inflation level over the years:
Other news from NBU
The bank expects to keep inflation under control with the new key interest rate and reach the goal of 5 percent inflation in 2022. The NBU also wrote that it expects GDP growth to remain at 4 percent per year from 2021 to 2023.
The NBU also wrote that it expects progress in the negotiations between Ukraine and the International Monetary Fund, IMF, about the 5 billion dollar loan agreed upon last year. However, Ukraine still needs to be paid half of the loan, which the IMF has halted due to the slow reform progress in Ukraine.
“Long delays in the performance of the agreement on cooperation with the IMF would create risks to financing the state budget deficit, especially in the coming years. This could also deteriorate inflation and exchange rate expectations, forcing the central bank to tighten its monetary policy,” NBU wrote and warned about the dangers ahead.
Among other things, NBU pointed out that the Ukrainian economy is vulnerable to the new coronavirus variants such as the Delta variant, which could force Ukraine and other countries to large lockdowns. NBU also wrote that Ukraine is susceptible to rising inflation globally, which could force NBU to take further measures to control inflation.
“The NBU’s forecast envisages that the key policy rate will be raised further, to 8.5%, and maintained at that level until Q2 2022, with a view to bringing inflation back to its 5% target in 2022 and keeping inflation expectations in check. If additional pro-inflationary risks materialize, the NBU stands ready to continue deploying monetary tools to return inflation to its 5% target,” the bank wrote.