Ukraine's key policy rate reduced to 13%. Central bank predicts acceleration of inflation

The National Bank of Ukraine decided to reduce the discount rate by half a percentage point to 13.0% starting on June 14, the regulator announced on Thursday.

The lower rate is intended to support the recovery of the economy, but such a modest reduction is related to expectations of an acceleration of inflation in the coming months and its departure from the target range (5% +/- 1 p.p.) by the end of the year.

In May, actual  consumer inflation accelerated to 3.3% in annual terms, but was lower than the forecast of the National Bank. Core inflation was 4.4%, remaining within the target corridor for more than half a year.

The acceleration of inflation will be due to a lower harvest after last year's records, pass-through of wage growth, higher electricity tariffs and continued pressure on business spending in wartime conditions.

In addition, the  potential increase in indirect taxes and excise duties to finance budgetary needs may also have an additional contribution to the inflation rate this year.

"Taking into account the balance of risks, the still restrained inflation indicators and the ongoing improvement of inflation expectations, the NBU board decided to lower the key policy rate by 0.5 percentage points to 13.0%," the NBU press release reads.

The key policy rate is a key indicator of the value of money in the country, on which interest rates for loans and deposits depend.

After the start of the war, it was sharply increased from 10% to 25%, and it remained at this level until July 2023. Then, in connection with a significant slowdown in inflation, the central bank began to gradually reduce the rate, until in December 2023 it dropped to 15%.

In March 2024, the NBU resumed its reduction.