National Bank of Ukraine delivers another drastic rate cut in October

At its 26 October meeting, the National Bank of Ukraine (NBU) slashed its key policy rate by 400 basis points to 16.00%, equal to the overnight certificates of deposit rate. The decision, which came on the heels of September’s 200 basis point cut and came into effect on 27 October, caught markets by surprise.

The Bank continued its monetary policy easing cycle—which began in July—with an outsized cut, as both headline and core inflation cooled further in September. In turn, the NBU nearly halved its end-2023 inflation forecast to 5.8% from 10.6% previously thanks to increased stability in FX markets, a moratorium on raising utility tariffs and a large harvest easing price pressures for food. That said, the Bank sees inflation accelerating to 9.8% next year (previously 8.5%) on a low base of comparison, stronger economic activity and pass-through effects from higher wages and increases in administered prices. Meanwhile, the NBU raised its GDP outlook for 2023 on the better-than-expected harvest, the adaptation of the economy to wartime conditions and higher public spending.

The Bank did not rule out another rate cut at its final meeting of 2023 on 14 December, conditional on the market’s adaptation to the more flexible exchange-rate regime that was adopted earlier in October and on the balance of risks to inflation. Looking towards next year, the NBU struck a dovish tone, stating that “the expected trajectory of inflation and planned steps to liberalize the FX market some more limit the room for easing interest rate policy next year”. As such, the policy easing cycle will only continue if pressures on the currency and prices moderate substantially. Given the unexpected size of October’s cut, our panelists are currently revising their projections for the key policy rate.

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