Ukraine’s Central Bank Ups Key Rate by Another 1% as Salary Inflation Puts Pressure on Prices

Ukraine’s central bank, the National Bank of Ukraine (NBU), increased the key interest rate from 14.5% to 15.5%, reaching the peak rate increase projected from the beginning of the year. 

The rate hike was also higher than most of the market predicted, as Ukraine’s central bank increased the rate by 1% instead of 0.5%, according to the ICU barometer survey. 

The NBU announced the decision at a monetary briefing on Thursday.

Last summer, the central bank forecasted inflation to be no more than 10%, although the prediction overlapped with forecasts from autumn 2024.

Inflation was initially triggered by a drought in the summer of 2024, but the hike became more permanent as businesses spent more on higher energy prices and wages to boost talent acquisition. Both of these costs increased consumer prices, passing on to everyday buyers.

To attract labor, enterprises also increased salaries by 14.4% in real terms last year, passing the increase on to consumers through increased costs of their products.

The inflation spiked so much that Ukrainians began looking online for more specific economic indicators, the central bank observed. 

“The statistics of search queries show that attention to inflation remains high,” NBU governor Andrii Pyshny said during a press briefing. 

Apart from increasing the key rate, the central bank of Ukraine is also increasing the interest rate by 1% of some other products, including three-month certificates of deposit and overnight loans for the banks.

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According to the central bank, all of these measures are intended to motivate Ukrainians to keep their savings in hryvnia instead of dollars and to prevent over-consumption that could fuel inflation further.

“Inflation should return to the downward trajectory in H2 and decline to single digits at the end of the year. Inflation will decline to the 5% target over the policy horizon,” Pyshny said. 

Ukraine also has several internal buffers to help get through political turmoil, the banker said, even after US President Donald Trump’s decision to slash American military aid to Ukraine. 

“G7 countries disbursed the first tranches of assistance to Ukraine under the ERA Loans program – loans backed by proceeds from immobilized Russian assets. In late February, Ukraine also reached a staff level agreement with the IMF on the seventh review of the Extended Fund Facility,” Pyshny said. 

War shapes the economy, but Ukraine has sufficient reserves

The duration and intensity of Russia’s war in Ukraine will impact the economy’s return to normal functioning and pose the risk of further weakening the country’s economic potential, the central bank governor said. 

The impact of the end of the war on Ukraine’s economic activity will occur over months, and it will require a robust security agreement with allies to give investors confidence in Ukraine’s long-term economic stability and potential for growth. 

The NBU does not expect a sharp transition in economic growth projections after the war ends, NBU Deputy Governor Sergiy Nikolaychuk previously told Kyiv Post.

“We don’t believe there will be a specific ‘Day X’ that will completely change the situation. In our view, this process will be rather gradual, impacting macro-financial stability and the return to normal. The reduction of security risks will also be gradual – both in the lead-up to this ‘Day X’ and after it,” Nikolaychuk said.

If Russia persists in terrorizing Ukraine, it will cause further loss of people, territories, and production facilities, the NBU governor reiterated. 

Among other war risks, Ukraine’s central bank is primarily concerned about:

• Additional budgetary needs, mainly those needed to maintain defense capabilities 
• Further damage to infrastructure, especially energy infrastructure, which will restrain national economic activity, and put pressure on production costs and thus prices
• A deepening of migration avenues out of Ukraine and a further increase of labor shortages in the domestic labor market.

Waiting for frozen Russian assets

The National Bank puts hope in there being increased financial support from European partners, especially by receiving the principle from frozen Russian assets held through international sanctions.

But after three years of talks regarding use of the $210 billion in frozen Russian assets, progress has been limited to creating financial aid for Ukraine based on interest on the assets physically located in Europe. 

“Immobilized Russian assets must be accessible for Ukraine to cover the damages and compensations caused by Russia’s war,” Pyshny said, replying to a question from Kyiv Post. 

Pyshny said Ukraine’s government created a new working group to get access to the full sum of Russian assets.