NBU raises key rate for second consecutive time due to inflation and war risks

The National Bank of Ukraine raised its key policy rate by 0.5 percentage points to 16%. This is the second consecutive increase after the regulator reversed its monetary easing cycle in July amid mounting inflationary pressure.

The decision was driven by persistent fundamental price pressures, secondary effects from supply shocks, and strengthening medium-term inflationary risks, the NBU said.

In August, consumer inflation in Ukraine accelerated to 8.1% year-on-year, somewhat higher than the central bank's July forecast.

One of the main factors was higher-than-expected fuel prices due to the escalation of the war in the Middle East. Additional pressure on prices came from rises in some administered tariffs and the consequences of Russian attacks on critical infrastructure.

Core inflation also remains high. The NBU assesses that businesses continue to face rising costs for electricity, logistics, and labor, while inflation expectations of households and businesses remain elevated.

Despite Russian attacks, consumer demand and the labor market remain resilient. Wages continued to grow rapidly in July and, according to the regulator's estimates, in August, which also supports underlying price pressure.

From rate cuts to two consecutive hikes

At the beginning of 2026, the NBU moved in the opposite direction. In January, the regulator cut the key rate for the first time in a long while, from 15.5% to 15%, and announced the start of an easing cycle.

However, already in March, the central bank paused further cuts and kept the rate at 15%. Among the main reasons, the regulator cited worsening inflation expectations and a sharp rise in global energy prices due to the war in the Middle East.

In July, the NBU definitively switched to tightening monetary policy and raised the rate from 15% to 15.5%. The regulator then explained the decision by a persistent strengthening of fundamental price pressures.

The September decision lifted the rate by another 0.5 percentage points to 16%.

The NBU expects the higher rate to support the attractiveness of hryvnia deposits and other hryvnia assets, reduce pressure on the foreign exchange market, and help keep inflation expectations under control.

After the July hike, some banks have already started to raise rates on hryvnia instruments. The NBU assesses that the additional tightening of monetary policy should not significantly slow lending, which has recently continued to grow.

Inflation may stay elevated until 2027

The NBU expects inflation may exceed the previous forecast in the coming months. Prices will be pressured by the consequences of intensified Russian attacks on logistics, production, and energy facilities, as well as more expensive fuel.

At the same time, a significant supply of food on the domestic market could restrain inflation. It partly increases due to problems with exporting the Ukrainian harvest through the Black Sea.

Inflation is expected to return to a sustainable slowdown in 2027, according to the regulator's forecast. The NBU's medium-term target remains unchanged at 5%.

NBU warns of risks to international financing

The regulator singled out the situation with public finances as a separate risk. In July-August, Ukraine received smaller than expected official external financing, which caused international reserves to decline and fiscal policy to become more restrained.

The NBU emphasizes that a significant part of international assistance depends on Ukraine's implementation of reforms and the adoption by parliament of draft laws envisaged by support programs. Provided these commitments are fulfilled, the regulator expects the financing gap to be largely compensated in the coming months.

The NBU continues to cite the course of the war, new defense and reconstruction budget needs, labor shortages, possible disruptions in international financing, and a prolonged war in the Middle East as key risks to the economy.

If risks to inflation intensify further, the central bank is ready to apply additional measures. Conversely, if the deterioration of the security situation substantially cools consumer demand and the labor market, the NBU allows for the possibility of easing monetary conditions.

The next key rate decision will be announced by the NBU on October 29.

Based on: National Bank of Ukraine - September 17, NBU - decision from January 29, NBU - decision from March 19