The NBU has raised its key interest rate again. What impact will this have on inflation and Ukraine's economy?

The National Bank of Ukraine (NBU) raised the discount rate by 1% to 14.5% on January 23. The regulator explained that this decision aims to curb inflation, which has accelerated recently. However, the NBU does not rule out that this increase may not be the last one this year. How the change in the discount rate will affect inflation in Ukraine and what economic consequences it may have – read in the article by journalist Alik Sakhno from RBC-Ukraine.

The NBU has revised its inflation growth forecast down from the previous October report: from 6.9% to 8.4% (+1.5%). Thus, the regulator aims to contain price increases in Ukraine, even though the last time the discount rate was raised by the National Bank was from 13% to 13.5% a month ago.

How the discount rate affects inflation

The mechanism of curbing inflation through raising the discount rate theoretically works as follows: loans for businesses and individuals become more expensive, which reduces economic activity and encourages people to deposit money instead of taking loans.

"When demand for goods and services decreases due to reduced purchasing power, it impacts market mechanisms where price is determined by the balance of supply and demand. In this case, prices do not rise as quickly because there are not enough buyers. This illustrates the effect of the discount rate: formally, it is a tool for combating inflation, but it can simultaneously slow down economic development. If access to loans is restricted, businesses cannot actively grow, as most companies today operate not on their own funds but on borrowed capital," explained economist Oleg Pendzin in a comment to RBC-Ukraine.

He adds that it is currently difficult to predict how the increase to 14.5% will affect the annual inflation rate and gross domestic product (GDP). Pendzin notes that while the hike may be painful for small and medium-sized businesses and negatively impact economic growth, this step is necessary in the context of rising inflation.

The economist explains that under certain circumstances, the discount rate may not only remain unchanged throughout the year but could also be lowered. According to him, factors such as the cessation of war and a good harvest in the summer could contribute to a decrease in inflationary pressure and stabilize the economic situation.

It is noteworthy that the NBU maintained the discount rate at 10% since the beginning of the war, but in June 2022 decided to raise it to 25%. This rate remained unchanged until July 2023, when the NBU began a gradual reduction process. As a result, the rate decreased to 15%. In 2024, the National Bank continued to lower the rate, and since June it has been held at 13%. However, in December 2024, the NBU again raised the rate to 13.5%.

Why inflation is rising in Ukraine

President of the investment group "UNIVER" Taras Kozak also agrees on the prudence of raising the rate. He notes that this tool has shown some effectiveness during previous inflation spikes. In his opinion, since prices increased by 12% last year instead of the anticipated 8.5%, the increase in the discount rate seems justified. However, the expert adds that the main causes of inflation in Ukraine are not only monetary factors.

"First and foremost, inflation is influenced by the rising prices of consumer goods, particularly food and vegetables. An important factor is also the increase in wages, as the official unemployment rate in Ukraine remains very low. This is explained by several factors: people do not register with the employment service due to fear of mobilization, some have moved abroad, and others are on the front lines. Consequently, competition for labor forces employers to raise wages to attract workers. Additionally, energy supply issues complicate production processes, which also contributes to rising prices," explains Taras Kozak to RBC-Ukraine.

At the same time, Deputy Director of the National Institute for Strategic Studies Yaroslav Zhalilo believes that the problem with these measures is that the National Bank increases the rate under the influence of last year’s double-digit inflation. According to him, the NBU almost constantly faces forecasting difficulties regarding prices, so the impact of raising the rate on future inflation may not be significant.

"We are currently dealing with cost-push inflation, meaning prices are rising due to increased costs. This is significantly influenced by the war, which leads to additional expenses related to its consequences. From business and building recovery to problems with electricity supply, which forces many enterprises to use generators or other alternative energy sources. As a result, production and maintenance costs increase," explains Zhalilo.

Potential negative factors from the NBU rate hike

Taras Kozak adds that the effect of raising the discount rate may be diminished because Ukrainians are currently primarily taking preferential loans for business under the "5-7-9" program and for housing under the "eOselya" program. Essentially, banks issue these loans at their own rates, which can exceed 20% per annum, but the government compensates for this difference from the budget.

However, Oleg Pendzin does not entirely agree with this statement, pointing out that not many people can take advantage of preferential loans. Moreover, even if they meet the requirements, they are forced to go through a complicated bureaucratic procedure. As a result, according to Pendzin, many Ukrainians opt for loans at standard rates or turn to microcredit organizations.

On the other hand, Yaroslav Zhalilo notes that raising the discount rate may impose additional burdens on the state budget. He claims that besides compensations for the preferential programs "5-7-9" and "eOselya," the government will be forced to pay high interest rates on government securities.

"The main influence of the discount rate is now reflected in the cost of government bonds. The National Bank will also sell deposit certificates to commercial banks at the new rate. Thus, in fact, it takes on additional obligations, since it will later have to repay these certificates to the banks that acquired them," – says Zhalilo.

Taras Kozak clarifies that there is a time lag of several months for changes in loan and deposit interest rates under the influence of the discount rate.

He also notes that for the population, this could be a positive moment, as Ukrainians will have greater interest in investment instruments such as government domestic loan bonds (OVGZ) and bank deposits. However, Kozak is not ready to accurately predict by how many percentage points they will rise, as, according to him, the Ministry of Finance has recently focused on lowering interest rates on OVGZ.

The preparation of this material utilized comments for RBC-Ukraine from economist Oleg Pendzin, president of the investment group "UNIVER" Taras Kozak, and deputy director of the National Institute for Strategic Studies Yaroslav Zhalilo, as well as data from the website of the National Bank of Ukraine.