Ukraine's central bank raised its main interest rate for the sixth time and said it "will continue the cycle of strengthening monetary policy and is ready to act decisively in the event of further implementation of pro-inflationary factors," such as an escalation of the conflict with Russia and further spikes in prices.
The National Bank of Ukraine (NBU) raised its discount rate by 1 percentage point to 10.0 percent and has now raised it 4 percentage points since it began tightening its monetary policy stance in March 2021 in response to accelerating inflation amid improving demand and economic activity.
"The realization of a significant number of pro-inflation risks requires strengthening the NBU's monetary policy to improve inflation expectations and ensure a steady reduction in inflation to 5%," the board of the central bank said.
The National Bank of Ukraine (NBU) raised its discount rate by 1 percentage point to 10.0 percent and has now raised it 4 percentage points since it began tightening its monetary policy stance in March 2021 in response to accelerating inflation amid improving demand and economic activity.
"The realization of a significant number of pro-inflation risks requires strengthening the NBU's monetary policy to improve inflation expectations and ensure a steady reduction in inflation to 5%," the board of the central bank said.
With economic growth expected to improve in 2022 from last year and inflation to be higher than previously forecast, NBU will keep monetary conditions "moderately tight" across its forecast horizon, adding the discount rate "will be at a level not lower than neutral" this year and following years.
To strengthen the transmission of its policy and manage the surplus of liquidity in the banking system, NBU said it would raise the required reserve ratio on deposits in both hryvnia and foreign currencies by 2 percent in February, and would consider further measures in March.
While the central bank said it would continue to use foreign exchange interventions to smooth excessive fluctuations, it added it would refrain from planned daily purchases of foreign currency in coming quarters to replenish its reserves, which amounted to US$5 million from August last year.
Today's rate hike comes as inflation has eased in the last three months and fell to 10.0 percent in December from a 2021-peak of 11 percent in September, helped by record harvests, lower world food prices, a stronger exchange rate of the Hryvnia and past rate hikes.
However, NBU said this decline was slower than expected and while it expects inflation to ease this year, it will first return to the 5 percent target in 2023 as energy prices remain higher than expected and rising incomes and stable consumer demand will restrain any slowdown in inflation.
NBU raised its forecast for inflation in 2022 to 7.7 percent from 5.0 percent.
However, NBU said this decline was slower than expected and while it expects inflation to ease this year, it will first return to the 5 percent target in 2023 as energy prices remain higher than expected and rising incomes and stable consumer demand will restrain any slowdown in inflation.
NBU raised its forecast for inflation in 2022 to 7.7 percent from 5.0 percent.
Ukraine's economy grew around 3.0 percent in 2021 but the central bank lowered its forecast for growth this year to 3.4 percent from an earlier 3.8 percent due to the impact of expensive energy and the effect of the tensions with Russia, which continues to have some 100,000 troops by Ukraine's border.
A new inflation report with updated forecasts will be published Jan. 27.
"The key risks to the forecast remain Russia's escalation of the military conflict and a longer-than-expected price spike in the world," the bank said, adding prolonged geopolitical tensions can have a very negative effect on the expectations of citizens, businesses and investors.
"It will also be a significant barrier to investment in the economy and make it more difficult to attract external financing," NBU said, adding in the event of a worsening of geopolitical risks, it would be ready to strengthen monetary policy.
