National Bank of Ukraine raises key policy rate in March

Central Bank hikes by 100 basis points: At its meeting on 6 March, the National Bank of Ukraine (NBU) decided to raise its key policy rate by 100 basis points to 15.50%, broadly in line with market expectations. Additionally, the NBU adjusted other parts of its monetary policy, including the interest rates on refinancing loans plus the spread between its key policy rate and the interest rate on three-month certificates of deposit.

Higher inflation in January triggers hike: The key domestic factor driving the NBU's decision was primarily the fact that inflation continued to increase at the start of the year, reaching 12.9% year on year in January and rising further in February, according to NBU estimates. This was attributed to strong consumer demand plus elevated business expenses on energy and wages passing through to prices. Additionally, the recent freeze on U.S. military aid poses an upside risk to inflation, as Russian strikes on the energy grid have flared domestic prices.

Bank strikes a hawkish tone: The NBU indicated its readiness to take additional monetary measures if risks to price dynamics and inflation expectations continue to rise, suggesting a potential for further tightening of its interest rate policy if inflationary pressures persist. The NBU also acknowledged the possibility of starting a cycle of rate cuts later than expected if inflationary risks increase. Our Consensus is for the policy rate to end 2025 about 150 basis points below current levels. Uncertainty around foreign aid inflows plus the evolution of potential peace talks are key risk factors to watch. The NBU will reconvene on 17 April.

Panelist insight: Commenting on the coming Central Bank decisions, EIU analysts said: “Inflation should ease in the spring/summer […] as pressures on the energy sector ease, and there may be room for some reconstruction of key energy infrastructure if peace talks begin under ceasefire terms, easing supply further. We expect inflation to begin to stabilise in the medium term, and for the bank to be able to start another cycle of monetary policy easing in late 2025 until mid-2027, with the policy rate settling at 8% by the third quarter of 2027.”

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