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Photo: https://bank.gov.ua
The vast majority of the National Bank of Ukraine’s (NBU) Monetary Policy Committee (MPC) members anticipate a further hike in the key policy rate in 2026 due to prevailing short-term pro-inflationary risks, according to discussion outcomes published on Monday.
Nine out of 11 MPC members at this meeting voted for an increase in the rate to 15.5% from 15%, while two advocated for maintaining it at the current level.
“Several MPC members noted that if the NBU maintained a passive stance, inflation could not only return to double digits relatively quickly but also become entrenched there,” the statement indicated.
Proponents of the July rate increase pointed to intensifying fundamental price pressures and pro-inflationary risks. Core inflation accelerated to 8.1% year-on-year in June, significantly surpassing the regulator’s forecast, although headline inflation slowed to 7.2% thanks to the seasonal expansion of fresh produce supply.
In their view, raising the rate should bolster the attractiveness of hryvnia-denominated assets and the stability of the currency market, as well as curb the risks of deteriorating inflation expectations.
Among the key pro-inflationary factors, MPC members cited the continued rise in production costs and wages amidst a labor deficit, expansionary fiscal stimuli, secondary effects from fuel price increases and the previous weakening of the hryvnia, as well as the consequences of Russian attacks on businesses and logistics, and the conflict in the Middle East.
One MPC member believed the choice should not have been between maintaining and raising the rate, but between a 0.5 percentage point (p.p.) increase and a more substantial step. Ultimately, they supported a 0.5 p.p. hike, partly due to the potential temporary disinflationary impact of challenges with agricultural exports following the destruction of port infrastructure.
Participants in the discussion also highlighted the risk of prolonged conflict in the Middle East. According to the National Bank’s baseline forecast, the direct and indirect effects of this factor will add 1.7 p.p. to annual inflation in 2026, while if oil prices remain above $100 per barrel until year-end, the contribution could rise to approximately 3 p.p.
Separately, Committee members emphasized the risks to the currency market due to the significant widening of the budget deficit, increased demand for imports for the defense industry, and the consequences of external shocks. One participant noted that the increase in the key policy rate is aimed, in part, at protecting international reserves.
The two MPC members who favored keeping the rate at 15% believe the current monetary policy tightness is sufficient for inflation to gradually return to the 5% target.
Among disinflationary factors, they mentioned a possible increase in domestic grain supply due to difficulties in its export, as well as the restraint of economic activity and wage growth rates as a result of Russian attacks.
One of them also stated that a rate increase of 0.5-1 p.p. would not have a significant impact on financial conditions and would primarily serve a signaling function, which is not currently needed due to relatively stable inflation expectations and the attractiveness of hryvnia assets.
A few MPC members, in contrast to the majority, expect the balance of risks for the inflation forecast in the coming year to be tilted downwards, thus precluding the need for further monetary policy tightening.
Committee members also supported the phased modernization of the operational design of monetary policy. In the first stage, instead of fully satisfying banks’ applications for three-month certificates of deposit, the NBU will conduct bi-weekly interest rate tenders with a declared placement volume at a rate not exceeding the level of “key policy rate + 3.5 p.p.”.
According to the participants’ assessment, this mechanism should maintain incentives for banks to compete for term hryvnia savings while simultaneously encouraging them to actively manage their own liquidity.
As reported, on July 30, the NBU board raised the key policy rate by 0.5 p.p. to 15.5% per annum. Prior to this, the regulator had kept it at 15% since the end of January 2026.