Ukraine National Bank hikes key policy rate to 16% as expected

On Thursday, the National Bank of Ukraine (NBU) unexpectedly increased its key policy rate to 16% annually, as anticipated. This decision was driven by persistent price pressures, supply shock second-round effects, and heightened medium-term inflation risks, according to the regulator. The move aims to maintain the attractiveness of hryvnia-denominated assets, stabilize the foreign exchange market, and curb inflation expectations, paving the way for sustainable decline toward the 5% target over the policy horizon.

In August, consumer inflation unexpectedly reached 8.1% year-on-year, surpassing the NBU's July forecast, largely due to the strong surge in fuel prices fueled by the Middle East war escalation and rapid growth in certain regulated tariffs stemming from Russian attacks on crucial infrastructure. The central bank anticipates inflation to remain higher in the upcoming months than initially projected but expects it to slow down by 2027.

Additionally, official external financing in July and August was lower than expected, leading to a dip in international reserves. Nonetheless, if Ukraine adheres to its support program commitments, a substantial portion of the financing is expected to be replenished in the forthcoming months. The NBU also highlighted potential risks, including additional defense and reconstruction budgetary needs and wage pressures due to labor shortages.

Conversely, a deteriorating security situation could dampen consumer demand and the labor market, possibly prompting a disinflationary effect. Should security deterioration result in notable cooling of consumer demand and the labor market, the NBU will consider the feasibility of easing monetary conditions. The Monetary Policy Committee will deliberate on whether to raise the key policy rate to 16% per annum, with the results to be disclosed on September 28. The National Bank's subsequent monetary policy board meeting is scheduled for October 29, 2026.