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Ukraine Monetary Policy June 2022

Ukraine: NBU delivers large rate hike in unexpected June meeting

At a surprise meeting on 2 June, the National Bank of Ukraine (NBU) raised its key policy rate by 1,500 basis points to 25.00% from 10.00%. The move marked a continuation in the monetary policy tightening cycle, which stalled in February due to Russia’s invasion of the country and the all-out war that ensued.

The Bank decided to postpone its key rate decisions until economic conditions returned to normal, stating that “market-based monetary instruments such as the key policy rate no longer play a significant role in the operation of the monetary and FX markets”. Now, the NBU’s decision to raise rates to their highest levels in nearly seven years was mainly driven by surging inflation (April: 16.4%) and a desire to spark investor interest in hryvnia assets. Although measures in their previous meeting helped to ensure price stability, the NBU expects inflation to continue its upward trend in the coming months.

On the economic front, the Bank stated that a small degree of recovery in activity and low domestic demand also helped keep price pressures in check. As such, the board decided that current conditions warranted a decisive move in order for yields to exceed inflation rates.

In its communiqué, the NBU explicitly stated that it “expects that a significant rise in the key policy rate, to 25.00%, will be sufficient to ease pressures on the FX market and stabilize inflation expectations, which in the future will lay the foundations for a monetary policy easing cycle.” Therefore, the Bank hinted that it would lower rates once conditions allow. Although the majority our panelists need time to adjust their forecasts to recent developments, most expect the NBU to lower them by the end of the year. That said, projections remain tied to the outcome of Russia’s assault.

The next monetary policy meeting is scheduled for 21 July.

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