Ukraine holds key rate at 13% as inflationary pressure grows

By Olena Harmash

KYIV (Reuters) – Ukraine’s central bank kept its main interest rate unchanged at 13% on Thursday, in line with market expectations, and said it would remain cautious in the coming months amid growing inflationary pressure on the wartime economy.

The central bank raised its inflation forecast to 9.7% at the end of 2024 from a previous forecast of 8.5%. Consumer inflation was rising faster than it had expected, it added.

Official data showed that consumer inflation in September accelerated to 8.6% year-on-year driven by higher food and energy prices and rising business costs. The central bank said it expected consumer prices to continue to rise in October.

Governor Andriy Pyshnyi said the central bank’s prior decisions and its prudent policies had created a buffer that allowed it to maintain control over inflationary processes, while also supporting the economy and lending to businesses.

“With a view to that we do not see reasons for now to change the rate by increasing it,” Pyshnyi told reporters at a briefing, adding that the key rate would be maintained at the current level until the end of the first half of the next year.

He said that inflation had not yet peaked.

The central bank last cut its rate in June, lowering it from 13.5%.

WAR REMAINS KEY RISK

The war against Russia remained the key risk for economic development and inflation dynamics, Pyshnyi said.

“The war continues. And the risks of a further decline in economic potential remain, in particular, due to the loss of people, territories and production facilities,” he said. “The pace of the economy’s return to normal depends on the nature and duration of the war.”

As the war approaches the 1,000-day mark, Russian troops control about 18% of the Ukrainian territory and are steadily advancing in the east, overwhelming Kyiv’s stretched defences with many more soldiers and weapons.

Russia also regularly uses drones and missiles to attack Ukrainian cities and infrastructure.

Ukraine’s economy was battered by Russia’s invasion and gross domestic product fell by about a third in 2022. The economy returned to growth in 2023, with GDP rising by 5.3% but recovery remained limited.

The central bank slightly revised its forecast for GDP growth to 4% this year from an earlier forecast of 3.7%.

Kyiv-based investment house Dragon Capital said the negative impact of the national electricity deficit and labour shortages were largely offset by recovering exports via Odesa’s Black Sea ports. Russia’s bombardments have heavily damaged Ukraine’s power sector and energy infrastructure.

Dragon Capital also forecasts 4% GDP growth for this year but it says it is less optimistic about the next year.

“Real GDP will grow by 3% year-on-year in 2025 thanks to a gradual recovery in domestic consumption and the development of the weapon production industry, but electricity and labour shortages will continue to dampen growth,” it said.

The central bank expects GDP to grow by 4.3%-4.6% in 2025 and in 2026 due to significant budget spending, backed by international financing, rising household income, and a better harvest.

Pyshnyi said the government expects to receive more than $15 billion in international financial aid by the end of the year, with the total amount for 2024 reaching $41.5 billion. Next year Ukraine hopes to receive $38.4 billion, he said.