Sovereign Analysis /

Assessing Ukraine's rate hike

  • The NBU increased its policy rate by 15% to 25% on 2 June, its first rate change since the start of the war

  • The hike follows an acceleration in inflation (now at 16%) and risk from further deterioration in inflation expectations

  • The Bank also warned about the risks from dollarisation and expectations of currency depreciation

Assessing Ukraine's rate hike
Stuart Culverhouse
Stuart Culverhouse

Head of Sovereign & Fixed Income Research

Tellimer Research
6 June 2022
Published by

The National Bank of Ukraine (NBU) increased its policy rate by 15% to 25% on 2 June as it resumed monetary policy decisions, which were sensibly postponed after the start of the war.

The initial crisis phase has given way to the gradual adaption of the Ukraine economy and, as a result, the NBU now feels it can change its approach to a more active monetary policy. The policy rate had been left at 10% and, no doubt, part of the rate increase reflects catch-up during the interim period as well as emerging risks.

The hike takes the policy rate to its highest level since 2015. It is also the largest increase since then, too, when the policy rate was increased by 10.5% in March 2015 (from 19.5% to 30%).

NBU policy rate (%)

The move follows an acceleration in consumer price inflation, to 16.4% yoy in April, up from 10.7% in February, reflecting in part the global trend, but also Ukraine's own unique circumstances.

The bank noted that inflation was being fuelled by disruption to production and logistics due to the war, and high global energy prices, although some recovery in economic activity, and increased supply from both domestic producers and importers, was helping to curb inflation. NBU measures, including fixing the exchange rate, and administrative price caps imposed by the government were also helping to mitigate inflation pressures.

However, the central bank noted inflation was expected to rise further in May according to its preliminary estimates. CPI inflation for May is due on 9 June.

Ukraine's CPI inflation (% yoy)

Importantly, the NBU also flagged the risk from further deterioration in inflation expectations, dollarisation of the economy and the loss of system resources, with low yields on hryvnia assets and unstable expectations of currency depreciation. The Bank noted it had increased its interventions to sell foreign currency, from the monthly average of US$2bn in March-April to US$3.4bn in May, while the parallel market premium had widened. Reserves were still sufficient, at US$26.9bn, although were reliant on continuing international financial support.

In assessing its decision, the NBU noted that a small increase in the policy rate would have had no significant impact on the economy and financial system, only resulting in expectations of further increases, while a larger increase was needed to revive interest in hryvnia assets so that yields exceeded expected inflation.

A summary of the discussion will be published on 13 June and the NBU Board's next monetary policy meeting will be held on 21 July.