The board of the National Bank of Ukraine has decided to keep its key policy rate at 8.5% per annum.
This decision comes in line with a decline in inflation to 5% at the end of next year projected in the baseline scenario of the updated macroeconomic forecast. The NBU stands by its 2021 prediction of 9.6% inflation for Ukraine, slowing to 5% at the end of 2022. To bring inflation back to its 5% target, the NBU will keep its key policy rate at no lower than 8.5% at least until Q3 2022 rather than until Q2.
The key policy rate will be cut more gradually in 2022 than forecast by the NBU previously. The key policy rate is also expected to stand at 7.5% in late 2022, as opposed to 6.5%, as predicted in the previous forecast, according to the NBU.
Due to the current energy crisis and Ukraine’s low rate of vaccination the NBU has downgraded its GDP growth forecast for Ukraine from 4% to 3.8%. Co-operation with the IMF, which recently unlocked financial aid to Ukraine, will accelerate this growth. Ukraine’s current account deficit will be small in 2021 on the back of a bumper harvest and high export prices. However, it will widen markedly in the coming years. The threat of stricter lockdown measures continues to loom over Ukraine, which will affect economic activity. Supply, rather than demand, as was the case with previous lockdowns, will be more affected this time. If any of the pro-inflationary risks materialise, the NBU will raise its key policy rate in addition to using other economic tools to stem the problem.
A more detailed economic forecast by the NBU will be released on 28 October.