“The Board of the National Bank of Ukraine decided to raise the discount rate to 10% per annum. The realization of a significant number of pro-inflation risks requires strengthening the NBU’s monetary policy to improve inflation expectations and ensure a steady reduction in inflation to 5%.

After the peak in the fall of 2021, inflation declined, but more slowly than expected, and fundamental inflationary pressures even increased.

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At the end of the year, inflation was declining due to record harvests and adjustments in some world food prices, the effects of the strengthening of the hryvnia in previous months, the exhaustion of the low benchmark and the strengthening of monetary policy. Inflation was also restrained by administrative decisions on fixing tariffs for some housing and communal services (HCS). As a result, consumer price growth slowed from a peak of 11% in September to 10% in December .

At the same time, the faster slowdown in inflation was hampered by the transfer of further growth in world energy prices and pressure from other production costs of business, including wages, to the cost of goods and services. The influence of stable consumer demand also persisted. This, in particular, resulted in a further rise in core inflation to 7.9% at the end of the year.

Inflation will slow in 2022, but will return to the 5% target only in 2023.

The National Bank downgraded its inflation forecast for 2022 from 5% to 7.7%, due to a number of pro-inflationary factors.

In particular, world energy prices will remain higher than previously expected. This will not only put pressure on the production costs of the business, but will also require a gradual adjustment of tariffs for housing and communal services. There will also be significant price pressure from Ukraine’s trading partners, where inflation is only approaching peak values. In the future, the secondary effects of the growth of business production costs on raw materials and wages will be realized. More significantly than expected, wage growth will be fueled by rising demand for domestic labor both domestically and abroad, as well as occupational disparities in the labor market. Against the background of rising incomes, stable consumer demand will remain, which will also restrain the slowdown in inflation.

In addition, the deterioration of the information background against the background of geopolitical tensions at the end of last year affected the mood of various groups of economic entities and caused devaluation pressure on the hryvnia. This will create additional price pressure through the exchange rate channel and the expectations channel in the coming months.

The gradual reduction of inflation will be facilitated by the strengthening of the NBU’s monetary policy, the correction of world commodity prices, and the impact of last year’s record harvests. The global inflation surge and the end of the pandemic will have an additional impact, which will be reflected in a more significant correction in the prices of raw materials, food and logistics.

Strengthening monetary policy by the National Bank will also help reduce fundamental inflationary pressures. Core inflation is expected to slow to about 4% in the coming years, with the administrative component making a major contribution to rising consumer prices.

At the same time, inflation dynamics during 2022 will be quite volatile due to the effects of the comparison base. In addition, as in many countries around the world, Ukraine’s inflation surge will be longer than previously expected. Given the strength of pro-inflationary factors and the need to further support post-pandemic economic recovery, return inflation to the target range of 5% ± 1 in. n. for compliance with the monetary conditions set in the baseline scenario is expected in mid-2023.

GDP growth will accelerate somewhat to 3.4% in 2022, but a faster economic recovery will be limited by expensive energy and the impact of the information background around geopolitical tensions.

According to the NBU, in 2021 real GDP growth was about 3%. The recovery of the economy was facilitated by stable consumer demand, increased investment by enterprises after the crisis, as well as a record harvest of crops. At the same time, the economic recovery was slower than expected. Among the reasons are the rapid rise in energy prices and shortages, the impact of low yields in 2020, slower recovery of the service sector, limited capacity of some manufacturing sectors, more significant losses from the pandemic, as well as faster fiscal consolidation.

The forecast of real GDP growth for 2022 has been revised from 3.8% to 3.4%. The economy will be supported by consumer demand and still fairly favorable trade conditions. Instead, a tense geopolitical situation will remain a significant deterrent, which will negatively affect investment decisions. In addition, despite the gradual extinction of the pandemic, the consequences of the coronary crisis will remain quite significant. Relatively high energy prices and shortages of certain raw materials, especially in the first half of the year, will also limit growth potential.

In 2023–2024, real GDP growth will accelerate to about 4% per year. This should be facilitated by the stabilization of the geopolitical situation during 2022, the final exhaustion of the negative effects of the pandemic, further growth of the world economy and the preservation of fairly favorable trade conditions.

It is due to favorable trade conditions that the current account deficit was insignificant in 2021, but will continue to widen moderately due to growing domestic demand.

In 2021, the current account was consolidated with a small deficit (1.9% of GDP). This was facilitated by high world prices for the main goods of Ukrainian exports – food and products of the mining and metallurgical complex (MMC). At the same time, at the end of the year, the current account deficit widened rapidly due to a significant rise in energy prices, reduced external demand for MMC products and record dividend payments. Due to the revival of domestic demand, both consumer and investment, the negative balance will further expand – to 3.3% of GDP in 2022 and to 3.3-3.5% of GDP in subsequent years.

Further progress in cooperation with the IMF is one of the main factors contributing to more sustainable economic development.

IMF financing significantly supported the Ukrainian economy in 2020-2021. Cooperation with the Fund will be no less important in the future – especially in the current deteriorating information background amid tense geopolitical situation and increased competition from emerging markets for foreign capital due to tighter monetary conditions in the world.

According to the macro forecast baseline scenario, monetary conditions will remain moderately tight across the forecast horizon.

The discount rate will be at a level not lower than neutral during this and subsequent years.

In addition, to strengthen the interest rate channel of monetary transmission by managing the structural liquidity surplus in the banking system, the National Bank will increase by 2% in February. n. the ratio of required reserves on current accounts in hryvnia, as well as funds in foreign currency. This will stimulate longer-term involvement while maintaining the role of required reserves in dedollarization. Also in March, the issue of introducing other measures to regulate the structural liquidity surplus of the banking system will be considered.

The National Bank will continue to use the mechanism of foreign exchange interventions to smooth excessive market fluctuations. At the same time, the NBU has decided to refrain in the coming quarters from planned daily interventions to purchase foreign currency in the interbank foreign exchange market to replenish reserves (from August 2021 they amounted to 5 million US dollars).

The key risks to the forecast remain Russia’s escalation of the military conflict and a longer-than-expected price spike in the world.

Increasing the information background around potential military aggression is reflected in the fall in the value of Ukrainian assets and devaluation pressure. Prolonged geopolitical tensions can have a very negative effect on the expectations of the population, business and investors. It will also be a significant barrier to investment in the economy and make it more difficult to attract external financing. In case of aggravation of geopolitical risks, the NBU will be ready to strengthen monetary policy.

The further development of the global inflation surge remains a significant risk, including through the persistence of high energy and food prices. Some countries, including Ukraine’s trading partners, are only approaching inflation peaks. Further price dynamics in the world will significantly depend on the speed of response of leading central banks to inflation challenges. Procrastination will lead to an increase in external price pressure. Instead, the rapid tightening of monetary policy by key central banks carries risks of significant capital outflows from emerging markets.

The baseline scenario of the NBU forecast envisages a further reduction in the impact of the pandemic on the Ukrainian economy. However, the emergence of new variants of coronavirus against the background of still insufficient levels of vaccination creates risks of additional economic losses in 2022. New outbreaks of the pandemic are unlikely to hit consumer demand hard, but will stifle business activity. This will be accompanied by increasing inflationary pressures.

There are other risks of pro-inflationary nature.

Thus, a significant deterioration in trade conditions and / or a sharp decline in yields after last year’s records may create additional devaluation and price pressures.

The revival of labor migration against the background of the gradual extinction of the pandemic may exacerbate the imbalances in the domestic labor market and lead to greater growth in business spending on wages, which in turn will also affect consumer prices.

A separate risk is the speed of changes in administratively regulated tariffs. Simultaneous reduction of utility tariffs to economically justified levels will eliminate imbalances in the energy sector, but will create significant inflationary pressures and worsen expectations. Instead, postponing decisions on utility tariffs will accumulate quasi-fiscal imbalances and price pressures in the future.

As before, the National Bank estimates the risk balance for its baseline inflation forecast and interest rate as shifted upwards, especially in the medium term.

With this in mind, the National Bank will continue the cycle of strengthening monetary policy and is ready to act decisively in the event of further implementation of pro-inflationary factors.

A new detailed macroeconomic forecast will be published in the Inflation Report on January 27, 2022.

The results of the discussion of the members of the Monetary Policy Committee, which preceded the adoption of this decision by the Board of the National Bank of Ukraine, will be published on January 31, 2022.

The next meeting of the Board of the National Bank of Ukraine on Monetary Policy will be held on March 3, 2022 in accordance with the approved and published schedule .