Ukraine’s National Bank raises key policy rate to 13.5%, defying market expectations of 13%

The National Bank of Ukraine (NBU) announced on Thursday an increase in its key policy rate to 13.5% per annum, citing an inflation rise to 11.2% in November. This move surprised the market, where most participants had expected the rate to remain unchanged at 13%.

"The Board of the National Bank of Ukraine has decided to raise the key policy rate to 13.5% per annum. This decision is intended to preserve the sustainability of the FX market, keep inflation expectations in check, and gradually bring inflation down to the target of 5%," stated the regulator in a press release on its official website.

"The NBU sees a need to tighten its interest rate policy to reverse the inflation trend and bring back inflation to its 5% target on the policy horizon," the central bank added.

The NBU believes the higher key policy rate will help keep inflation expectations under control and support real yields on hryvnia instruments.

"This will fuel interest in hryvnia term deposits, and thus help reduce pressures on the exchange rate and prices, as temporary inflation drivers wear off," the release noted.

The regulator emphasized that ensuring FX market stability will remain a key factor in bringing inflation back onto a downward trajectory. The NBU highlighted its ability to offset structural foreign currency deficits in the private sector and smooth excessive exchange rate fluctuations due to sufficient international assistance.

In its statement, the NBU pointed out that inflation accelerated to 11.2% year-over-year in November. On one hand, the consequences of a constrained food supply due to this year's poor harvests remained a significant driver of price increases. However, the central bank expects this factor's impact on inflation to diminish next year with the arrival of a new harvest.

"On the other hand, the inflationary surge is starting to look more and more fundamental, which is evidenced by further growth in core inflation (up to 9.3% y-o-y in November)," the NBU said. This trend, it explained, is driven by rising production costs, including higher energy and labor expenses, as well as exchange rate effects from the hryvnia's earlier depreciation.

Although inflation expectations remain relatively stable, the central bank warned of growing risks of unanchored expectations as public attention to inflation processes increases.

As previously reported, the NBU Board had decided on October 31 to keep the key policy rate at 13% and announced its intention to maintain this level until mid-2025. This marked a departure from its earlier plan to begin easing the rate in the first quarter of 2025.