News & Analysis

Ukraine cuts key policy rate as deal agreed with IMF

Gavel and Ukrainian hryvnias on a wooden table

The National Bank of Ukraine (NBU) has decided to cut the country’s key policy rate by two per cent to 13.5 per cent, as it continues to ease monetary policy as the rapid appreciation of the hryvnia makes inflationary pressures decline faster than expected.

According to the NBU’s board, consumer inflation dropped by 5.1 per cent year-on-year in November, reaching the bank’s medium-term target of five per cent.

“The steady reduction has been driven by a gradual easing of underlying pressures on prices, reflected in a slowdown of core inflation, and by lower energy prices,” said the NBU’s governor Yakiv Smoliy, adding that the country’s national currency strengthened due to proceeds from Ukrainian exports, (the record harvest of grain and oil crops in particular), and the selling of foreign currency.

A previous macroeconomic forecast published by the NBU in October envisages that the key policy rate will be cut further, to eight per cent.

The NBU’s decision to cut the key rate follows the International Monetary Fund approving a 5.5 billion US-dollar stand-by arrangement for three years, widely seen as an endorsement for what IMF managing director Kristalina Georgieva called “impressive progress” under president Volodymyr Zelensky.

“Ukraine’s economic success depends crucially on strengthening the rule of law, enhancing the integrity of the judiciary, and reducing the role of vested interests in the economy, and that it is paramount to safeguard the gains made in cleaning up the banking system and recover the large costs to the taxpayers from bank resolutions,” Mrs Georgieva said after a phone conversation with Mr Zelensky on December 7, pointing to PrivatBank, Ukraine’s largest commercial bank that is still the subject of a legal dispute involving its previous owners.

“The IMF announcement is a critically important signal to investors and the business community demonstrating its seal of approval on Ukraine’s government’s reform process,” wrote the Financial Times, quoting Andy Hunder, president of the American Chamber of Commerce in Ukraine.

“There is a cause for optimism. Reaching the staff-level agreement on the new cooperation program with the International Monetary Fund is an important milestone in the progress of structural reforms in Ukraine as well as in maintaining macrofinancial stability and steady economic growth,” Mr Smoliy explained, noting, however, that other risks remain.

“A complete halt of the transit of Russian gas through Ukraine, intensified trade tensions and more turbulent global financial markets, an escalation of the military conflict and new trade restrictions introduced by Russia,” were cited as the top concerns.