The National Bank of Ukraine (NBU) has raised its policy interest rate from 8% to 8.5% to slow down inflation in the country, the bank announced on Sept.9.
A slight increase in the key policy rate was expected as inflation in Ukraine continues to accelerate, reaching 10.2% in July, according to Ukrainian economist Sergey Fursa. Inflation in Ukraine rose above 10% for the first time since 2018.
The NBU said it will maintain Ukraine’s key policy rate at 8.5% until April 2022 as it expects to bring inflation back down to 5% in 2022.
Because Ukraine’s economy is recovering from the coronavirus crisis, the inflation rate and key policy rate are being brought down slower than expected, experts said.
The key policy rate is the only way for the NBU to fight inflation. It determines all other interest rates in Ukraine. The higher the rate, the more expensive the loans that banks give to their borrowers. It encourages consumers to save money, rather than buy goods and services. The reduced demand for goods helps to slow down inflation.
Inflation is growing globally and impacting prices everywhere — “from the Chinese factories to supermarkets in the U.S.,” said Ukrainian economist Pavlo Kuchta. The rising inflation was partly triggered by the economic crisis accompanying the COVID-19 epidemic, as well as high energy prices and adverse weather conditions in July-August.
Ukrainian consumers expect that inflation will continue to grow. The NBU projects it will reach 11% in October. Ukrainians are feeling the impact of rising prices on basic goods and utilities: “They earn more but their spendings have also become bigger,” according to Kuchta.
Sugar prices, for example, rose by 83.5% and sunflower oil prices by 79%, while gas tariffs increased by 164.5% and electricity tariffs by 36.6%. The government should give subsidies to help Ukrainian deal with higher energy prices and live through the heating season, Kuchta said.
The NBU expects that inflation will begin to slow down at the end of 2021 and drop below 10%. Before the COVID-19 crisis, Ukraine has been successful at controlling inflation. In December 2019, the inflation rate was brought down to its lowest point, 4.1%.
