NBU cuts interest rates, improves economic forecast
The National
Bank of Ukraine (NBU) has updated its macroeconomic forecast for 2023,
revising its expectations for the inflation rate and GDP growth, as it
announced cutting the key interest rate from 25% to 22% on July 27.
Explaining the decision to cut interest rates, the NBU said "Given the favorable trends of the first half of the year, the NBU has significantly improved its inflation forecast for this year, revising it from 14.8% to 10.6%."
The NBU predicts a deceleration in price growth owing to a gradual decrease in global inflation and persistently tight monetary policy in Ukraine. The bank plans to ensure currency market stability and the appealing nature of UAH-denominated assets, which will help restrict price pressure.
However, the NBU cautions that future inflation decrease will progress more slowly than in previous months. Furthermore, Russian attacks in southern Ukraine, specifically the destruction of the Kakhovka Hydroelectric Power Plant, will somewhat influence price trends.
The NBU foresees the downward trend of inflation continuing in subsequent years.
“Decreased security risks will facilitate the restoration of optimal logistic routes, enhancing production, and increasing yields,” the message said.
“Additionally, this will clear the path for renewed investment inflows into Ukraine. The deceleration in inflation will also be aided by future drops in global prices, especially for energy. These factors will counterbalance the inflationary impact of the revitalization of domestic demand, wage growth, and adjustments to certain utility prices in the post-war period.”
Thus, the NBU expects inflation to decrease to 8.5% in 2024 and to 6% in 2025.
The NBU projects an upswing in domestic demand under conditions of stable power grid operation and macro-financial stability.
“Economic growth has been hampered by continuous missile attacks, sabotage of the grain corridor, and further destruction of infrastructure,” the report adds.
“Additionally, trade restrictions imposed on Ukrainian agricultural products by several EU countries have negatively impacted businesses. These factors resulted in a decline in Ukraine's exports in the second quarter and will continue to impede economic recovery.”
Given these conditions, the NBU forecasts Ukraine’s GDP will grow by 2.9% in 2023.
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