NBU Hikes Rate to 16.5% After Forecast Turns to Recession and Higher Inflation
The NBU lifted the key rate to 16.5% as it flipped its 2026 GDP forecast from 1.8% growth to a 0.4% contraction and raised its year-end inflation outlook to 12.5%. The central bank blamed Russian strikes on production and logistics, a port blockade and fuel prices. It plans to hold the rate until the Q2 of 2027.
Ukraine's National Bank of Ukraine (NBU) increased its key interest rate to 16.5% on October 29, 2025, following a significantly worse economic forecast. The country's economy is now projected to contract in 2026, with inflation expected to far exceed earlier predictions. The NBU's revised outlook aligns with the concerns raised by other analysts, who have highlighted the impact of recent Russian strikes on key Ukrainian businesses and the ongoing port blockade.
For the year 2026, the economy is expected to shrink by 0.4%, compared to the previous July forecast of 1.8% growth. Real GDP growth is also expected to slow down, with 0.4% in 2027 and 2.2% in 2028, down from the earlier projections of 2.8% and 3.0%, respectively. This marks the second consecutive year of contraction since the onset of Russia's full-scale invasion.
Inflation is projected to rise to 12.5% in 2026, up from the initial estimate of 10.0%, and to 7.3% in 2027, up from 6.9% before. The current account deficit is also expected to narrow to $3.6 billion in 2026, from the previously forecasted $16.1 billion, but widen to $49.5 billion by 2028. The decline in international reserves is a significant factor in the NBU's decision to raise the interest rate, dropping to $62.8 billion in 2026 and $57.0 billion in 2028, down from $69.7 billion and $70 billion before, respectively.
The current account deficit is narrower in 2026 but widens by 2028. The primary drivers of inflation are the surge in fuel prices due to the Middle East conflict and the ongoing Russian attacks on Ukraine's ports and logistics. The NBU estimates that the impact of these attacks alone will add around 0.7 percentage points to annual inflation.
Other factors, such as higher fuel prices and increased fiscal stimulus, also contribute to the price dynamics. The NBU governor, Andriy Pyshny, attributed the decline in the performance of metallurgical and ore mining enterprises, along with the deterioration in other industrial sectors, trade, and agriculture, to the war's impact.
Despite the tighter policy, lending growth remained robust in September, with net corporate loans increasing by more than 32% year on year and net retail loans surpassing 38%. However, international aid fell short of expectations due to delayed reforms, although parliament passed laws in October to unlock EU and IMF financing. The NBU anticipates that the key rate will remain at 16.5% until the second quarter of 2027, with a slow recovery expected in 2027-28, supported by investments in the defense industry, weapon production localization, and infrastructure reconstruction.
Written by urgent.news from Kyiv Post's reporting — not their text. Machine-written — may contain errors; check the original before relying on it.
