National Bank of Ukraine shocks markets with December rate hike

Latest bank decision: At its meeting on 12 December, the National Bank of Ukraine (NBU) decided to raise the key policy rate from 13.00% to 13.50%. The decision was the first hike in four meetings, and it took markets by surprise, as they had expected rates to remain unchanged.

Monetary policy drivers: The decision to increase interest rates was primarily aimed at supporting the hryvnia in the FX market, dampening inflation expectations and gradually reducing inflation to the target of 5.00%. Rising inflation through November and volatility in foreign exchange markets prompted the Bank to hike, alongside expectations of continued inflationary pressures from large budget expenditures, significant wage growth and worsening energy shortages.

Policy outlook: The NBU indicated that it would consider further tightening its interest rate policy in future meetings if “there are persistent signs of unrelenting inflationary pressures and the threat that inflation expectations might become unanchored”. Our panelists anticipate inflation to accelerate in 2025—peaking in Q3—and to nearly double the NBU’s inflation target over the whole year on average. As such, risks to the policy rate are skewed to the upside. That said, a slim majority currently see slightly lower interest rates in 2025. Given the unexpected nature of the Bank’s decision, our analysts could raise their interest rate forecasts in the coming months. The Bank will reconvene on 23 January.

Panelist insight: Goldman Sachs analysts Andrew Matheny and Johan Allen said: “Our view is that today's hike is mainly symbolic and should be interpreted as a means to signal that the NBU takes its (partial) inflation targeting role seriously. Real rates were already high prior to the meeting, and the main transmission channel of monetary policy has been via FX – which the NBU has kept stable since mid-year. […] As the NBU expects inflation to keep rising in the months ahead, we think there are risks that it delivers an additional 50bp hike at its meeting in January.”

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