The National Bank of Ukraine (NBU) will keep the key policy rate unchanged at 25% per annum, the bank stated in a report on December 8.
The decision to raise the key policy rate from 10% to 25% was decided in June to combat the double-digit inflation caused by Russia’s full-scale invasion of Ukraine, which battered the economy. The NBU previously said that the key policy rate will be maintained at 25% until at least the second quarter of 2024.
Chart (from NBU)
The bank noted that the rise in consumer prices accelerated to 26.6% year on year as of end-October. According to the NBU’s preliminary estimates, inflation continued to increase in November, although slower than envisaged in the October forecast.
“The rise in inflation continues to be driven mainly by consequences of hostilities and occupation of some regions of Ukraine, which primarily pushes up production costs and causes shortages of some products,” the NBU stated.
Additionally, the bank also blamed the recent surge of Russian attacks against Ukraine’s critical infrastructure, particularly targeting power supply facilities. As a result, economic activity in various sectors has been affected, including metallurgy, food industry, animal farming and the services sector.
In response to the attacks, Ukraine has implemented power outages across the country, which have negatively affected Ukraine’s GDP forecast for next year and decreased the supply of goods. Moreover, the increase in demand for fuel due to power outages has put additional pressure on energy prices. As such, the prices of goods and services have risen, even drastically in certain cases.
“An extended full-scale war by Russia and escalating terrorist attacks on the country’s critical infrastructure are the key risks for Ukraine’s economic development,” the bank wrote.
“The Ukrainian economy will continue facing limited logistics and electricity shortages in the long run. Weaker consumer demand can only partially offset the inflationary effect from higher production costs,” the bank added, noting that inflation will decelerate slowly and will significantly exceed the NBU’s 5% target in 2023-2024.
Nevertheless, the NBU believes that the overall dynamic of inflation “remains under control” and claims it is even “slightly below the trajectory of the macroeconomic forecast” made in October. The bank claims that the decision to raise the key policy rate in June and fixing the hryvnia exchange rate to 36.5685 to the dollar are the reasons behind stabilising inflation expectations. In addition, it sold $1.57bn in November to support the hryvnia.
The European Bank for Reconstruction and Development (EBRD) predicts in its 2022/23 Transition Report that Ukraine may suffer one of the worst falls in GDP after a war. In its economic forecast in September, the bank forecasted that Ukraine’s GDP will fall 30% this year but will start to recover by growing by 8% in 2023. However, its next forecast in February will likely be less optimistic and take into account the attacks on energy infrastructure that began on October 10.
Dragon Capital, the Ukrainian investment management company, revised its forecast in November to take the energy attacks into consideration and sees Ukraine’s GDP declining by 32% y/y this year.
"The fall in GDP will be deeper this year than we had expected in October," NBU Deputy Governor Serhiy Nikolaychuk told a news briefing, Reuters reported. "Next year the economic recovery will be very lethargic and much lower than we had expected."
International financial support will be crucial in 2023. The EU and the USA have promised €18bn and $10bn next year respectively. Meanwhile, the Ukrainian authorities and the International Monetary Fund (IMF) reached a staff-level agreement last month on economic policies for a Programme Monitoring with Board Involvement (PMB) that will start the process of a full IMF-supported programme with the potential of bringing in $20bn for budgetary needs.
“The PMB will help provide an anchor for macroeconomic policies and catalyse donor support. Strong policy implementation would help pave the way towards a full-fledged IMF-supported programme,” head of the IMF mission to Ukraine Gavin Gray stated.