Ukraine's central bank raises its key policy rate to 16.5 per cent

The National Bank of Ukraine raised its key policy rate by 0.5 percentage points to 16.5 per cent on 29 October, the central bank said, citing a marked increase in price pressures and a deterioration in inflation expectations.

It followed increases in July and September, when the board lifted the rate to 16 per cent on 17 September. The board said the decision would support the attractiveness of hryvnia assets and the sustainability of the foreign exchange market, and help keep inflation expectations and prices in check. The new rate took effect on 30 October.

Inflation forecast raised to 12.5 per cent

Headline inflation accelerated to 10.0 per cent year on year in September and core inflation to 8.8 per cent, and the bank estimates that both trends continued in October. It attributes the rise mainly to the direct and second-round effects of higher fuel prices caused by the war in the Middle East, and to Russian attacks on Ukraine's warehousing and logistics infrastructure. Households' inflation expectations stayed volatile and high, it said, while those of banks and analysts worsened markedly.

The bank raised its inflation forecast for 2026 to 12.5 per cent and estimates that the consequences of aerial attacks alone will add about 0.7 percentage points to annual inflation. It expects inflation to slow to 7.3 per cent in 2027, as the effect of higher fuel prices wanes, and to return to its 5 per cent target in 2028.

Growth forecast cut to a contraction

On the bank's estimates, real GDP fell by 0.5 per cent year on year in the third quarter, mainly because of the sea port blockade and attacks on production facilities and logistics, with metallurgical and ore mining enterprises suffering the greatest losses. It now forecasts a 0.4 per cent contraction in 2026, with the aerial attacks subtracting an estimated 1.9 percentage points. Growth of 0.4 per cent in 2027 rests on its technical assumption that logistics improve in mid-2027, and it expects 2.2 per cent in 2028 as security risks subside.

The forecast assumes Ukraine receives about USD 50bn of direct budget support and more than USD 32bn under the defence component of the Ukraine Support Loan in 2026, and USD 52bn and USD 37bn in 2027, enough to keep international reserves above USD 62bn in both years. The bank said assistance in the third quarter was smaller than expected, mainly because Ukraine delayed reforms, and that laws parliament adopted in October should unblock financing from the EU and the IMF. Reserves stood at USD 47.1bn at the end of September.

Deposit rates follow and lending keeps growing

Small banks were the first to raise hryvnia deposit rates after the earlier increases, and over the past month large institutions with big market shares had followed, the bank said, so demand for hryvnia savings held up. Net hryvnia corporate loans grew by more than 32 per cent year on year in September and net retail loans by more than 38 per cent, and the bank has adopted four packages of regulatory changes to support lending to defence, energy, agriculture and trade companies.

Its forecast envisages keeping the rate at the current level until the second quarter of 2027, though the bank says it will respond flexibly to the effect of the attacks on inflation and activity. The detailed October forecast is due in the Inflation Report on 5 November, a summary of the Monetary Policy Committee's discussion on 9 November, and the next rate meeting on 17 December. For hryvnia bond buyers, domestic auctions raised UAH 318bn in the first nine months.