The KEY POLICY RATE is the key rate and operational benchmark of the NBU’s interest rate policy. This rate serves as a basis for other interest rates on the NBU’s own transactions for providing and absorbing liquidity, which are conducted by the NBU to influence financial market conditions and to shape economic agents’ expectations, with a view to meeting its monetary policy objectives. Under the inflation targeting regime, the key policy rate acts as the main indicator of changes in monetary policy.

The value of the key policy rate is approved by a decision of the NBU Board on the basis of a comprehensive macroeconomic analysis conducted by the NBU, and a prepared forecast. 

More specifically, when forecast inflation is higher than the target, the central bank raises its key policy rate. Through the monetary transmission mechanism, the policy rate hike curbs overall price growth and brings inflation closer to its target. In the opposite case, the central bank cuts its key policy rate, stimulating overall price growth.

When making its decisions, the bank expects that key policy rate changes will have an effect in the medium-term. With a view to avoiding any substantial loss of economic growth, the NBU relies on the flexibility of the inflation targeting targeting regime, allowing a temporary deviation of inflation from its target, as long as it does not threaten to unanchor inflation expectations and does not prevent inflation from returning to its target over an acceptable monetary policy horizon.

russia’s full-scale invasion of Ukraine has decreased the effectiveness of the key policy rate. This is one of the reasons why the NBU has fixed the hryvnia’s exchange rate. That said, the key policy rate will resume its role as the main monetary instrument as the economy normalizes and thanks to measures taken to strengthen monetary transmission. This will allow the NBU to return to its regular inflation-targeting regime with a floating exchange rate.