The National Bank of Ukraine (NBU) has raised its policy interest rate from 7.5% to 8% to slow down inflation in the country, the bank announced on July 23.
The key policy rate determines all other interest rates in Ukraine’s economy, which, in turn, impacts economic growth and inflation.
The slight increase aims to slow down inflation, which accelerated to 9.5% in June, exceeding the central bank’s previous forecast of 9.2%. Overall, the NBU forecasted a 9.6% inflation for 2021.
Part of the increase was triggered by the economic crisis accompanying the COVID-19 epidemic. The bank expects inflation to rise up to 11% according to its chart, but it wants it to return to 5% by 2022.
The NBU stated it might raise the key policy rate further to 8.5% until mid-2022.
“Given the significant increase in underlying inflationary pressures, this step is necessary to return inflation to 5% in 2022 and keep inflation expectations in check,” the bank stated.
The increase in the cost of loans provided by the NBU to commercial banks affects the rate at which the banks give loans to their borrowers. The higher the rates, the fewer people seek loans, which slows down consumption and pushes down prices.
Because Ukraine’s economy is recovering from the coronavirus crisis, the process is slower than expected due to the outcome of quarantine restrictions in 2020. The NBU maintained its forecast at 3.8% gross domestic product (GDP) growth in 2021.
New coronavirus strains such as the contagious Delta variant may lead to new restrictions which would hurt the economy, according to Kyrylo Shevchenko, the governor of the NBU.
IMF loan
Shevchenko also believes the International Monetary Fund cooperation program could help Ukraine maintain its international reserves between $29 billion and $31 billion in 2021 – 2023.
The IMF is set to allocate $650 billion in “special drawing rights” to help 190 countries cope with the economic fallout of the coronavirus pandemic, including Ukraine, whose share would be $2.7 billion, an encouraging sign for the NBU.
Separately, Shevchenko said that Ukraine also expects the IMF to resume lending to Ukraine as part of the conditional $5 billion, 18-month loan agreement.
The Fund paused the lending program in June 2020 after the first installment of $2.1 billion. Ukraine expects to receive three equal tranches totaling $2.7 billion but must first meet the IMF’s conditions, which include the independence of the NBU and anti-corruption agencies.
Ukraine’s international reserves stood at $28 billion in June, 5% lower than in March due to “large repayments of external and internal public debt, which were partially offset by foreign-exchange inflows to the government,” according to the central bank.
Ukraine’s economy is officially expected to have a value of $150 billion in 2021, with a $50 billion national budget.
