Ukraine's central bank lowers key policy rate, improves inflation forecast

During the first quarter of 2024, consumer inflation slowed faster than the NBU expected. The warm winter weather has provided a greater supply of raw food and also reduced business energy costs.

Therefore, the central bank improved the inflation forecast to 8.2% for 2024. Inflation is expected to slow down to 6% at the end of 2025, and to 5% at the end of 2026.

At the same time, the real GDP growth forecast worsened, in particular due to the consequences of Russia's large-scale attacks on Ukraine's energy infrastructure. The National Bank expects the economy to grow by 3% in 2024 and by 4.5-5% in 2025 and 2026.

Taking into account the balance of risks, as well as better inflationary dynamics, the board of the regulator decided to lower the key policy rate to 13.5%. The basic scenario of the National Bank's forecast also foresees a reduction of the discount rate to 13% in the current year.

In addition, the NBU is preparing a number of steps for currency liberalization in the coming weeks.

Why this matters

The key policy rate is one of the main indicators of the economy. This is the interest rate at which the NBU provides funds to banks and, accordingly, below which it is unprofitable for commercial banks to give loans to clients. The key policy rate is perhaps the central bank’s most important tool for influencing inflation (price growth).

Thanks to the reduction of the rate, the regulator makes loans more accessible (because the interest on them becomes lower), as a result of which banks begin to give more money, there is more of it in the economy. But when there is more money, inflation accelerates: there is less money in savings, more "on hand", and, accordingly, people spend more.

Higher inflation actually leads to a devaluation of the hryvnia, because for the same amount, with rising prices, you can buy fewer goods.

And all this works the other way around — when the rate rises, loans and savings become more expensive, they stimulate the population to save more. After all, there is less money in the economy and inflation slows down.