All 11 members of the Monetary Policy Committee (MPC) of the National Bank of Ukraine (NBU) voted to keep the key policy rate at 15.5% per annum at their meeting on July 23, the central bank said on August 4. (chart)

“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,” the NBU stated in a press release.

Committee members said current monetary conditions were adequate to bring inflation to target, citing signs of easing fundamental price pressures, stability in the foreign exchange market, and controlled expectations regarding the exchange rate and inflation. Market surveys indicated that maintaining the rate was both expected and justified.

“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 press release said.

The updated forecast projects inflation falling to 5% within three years, in line with the principles of flexible inflation targeting. The NBU noted that holding rates steady, rather than tightening, would avoid additional pressure on lending, which has been rising due to strong competition among banks. “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 bank said.

Some members argued that a modest rate increase would not accelerate disinflation and that achieving the target by 2026 would require tightening that could damage the economy. Others warned that rate hikes would be premature, given the likelihood of improving conditions in the medium term, bolstered by higher food supply and price convergence with Europe.

However, two MPC members disagreed, citing persistent inflation risks, including war-related losses, uncertainty over external financing, the end of EU trade preferences, a stronger euro, and higher imports of energy equipment.

“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.