NBU committee unanimously backs keeping key policy rate at 15.5% in July
All 11 members of the Monetary Policy Committee of the National Bank of Ukraine (MPC) supported keeping the key policy rate at 15.5% per annum at the meeting on July 23, according to the results of the discussion published on the central bank's website on Monday.
"The participants in the discussion agreed that, given the slower-than-expected actual decline in inflation and the implementation of a number of pro-inflationary factors (which shifted the achievement of the inflation target to 2027, but within the policy horizon), the NBU should maintain sufficiently tight monetary conditions for a longer period," a press release on the NBU website said on Monday.
MPC members believe that the current level of monetary conditions is sufficient for a sustained reduction in inflation to the target level. This is indicated by signs of weakening fundamental price pressures, stability in the foreign exchange market, and controlled expectations regarding the exchange rate and inflation. Surveys, in particular among financial market participants, indicate that keeping the policy rate at 15.5% is expected and justified, so such a decision will not harm confidence in monetary policy.
"Several members of the MPC noted that under current conditions, the NBU could even further tighten interest rate policy to bring inflation to the target more quickly, but maintaining the policy rate at 15.5% provides the optimal balance between the goals of reducing inflation and supporting economic growth," the participants in the discussion believe.
It is noted that the updated forecast assumes achieving the inflation target of 5% within a three-year horizon, which is consistent with the principles of flexible inflation targeting. Keeping the rate at 15.5% instead of a tighter scenario will not put additional pressure on lending, which continues to grow due to high competition among banks for reliable borrowers.
"Yes, the cumulative growth of net hryvnia loans to businesses since the beginning of the year is about 20%. This supports the economic recovery," the press release says.
One of the participants in the discussion noted that a slight increase in the rate now will not accelerate disinflation, and achieving the 5% target in 2026 would require a significant tightening of policy with losses for the economy. An alternative strengthening of the hryvnia through interventions creates risks of depletion of reserves and devaluation.
Such actions would contradict the principles of flexible inflation targeting. Since expectations remain controlled, there is no reason to increase the rate.
"Two participants in the discussion also noted that an increase in the policy rate would be premature at this time, because the balance of risks, despite the increase in short-term threats, has a high probability of improving in the medium term," the NBU said.
An expansion in the supply of food products, in particular, thanks to a better-than-expected harvest of late vegetables and fruits and an increase in meat production against the background of a favorable external environment, they believe.
An important restraining factor also remains the convergence of domestic prices with European ones, which has intensified in recent years. Therefore, some members of the MPC suggest that inflation in 2026 may be lower than the NBU forecast, which reduces the feasibility of raising the rate now and opens up more space for future monetary policy decisions.
"Two other MPC members disagreed with the latter opinion, who believe that in the medium term, inflationary risks will also prevail," the press release says.
In addition to possible new losses from the war, a key challenge remains securing external financing against the backdrop of geopolitical uncertainty. Ukraine should actively work with the IMF and other partners. Additional inflation risks include the end of preferences with the EU, a strengthening of the euro, and increased imports of energy equipment due to attacks on infrastructure.
One MPC member emphasized that a rate cut now would look like unfounded optimism, as expectations still exceed the NBU's target. He emphasized the importance of not only maintaining the rate, but also of clearly communicating readiness to act in the event of new risks, as well as consistent policy in the foreign exchange market to stabilize expectations.
"MPC members expect the interest rate easing cycle to resume by the end of the year, but given the changes in the balance of risks to price dynamics, they are inclined to a more moderate and slower reduction in the key policy rate than previously assumed," the NBU said.
