According to the baseline scenario of the NBU’s forecast, inflation will decline to single digits as soon as by the end of the year and will continue to move toward its 5% target, which it will reach in 2027. Economic growth will slow to 2.1% this year and will accelerate to 2%–3% in the years ahead.
The NBU’s baseline forecast scenario is based on the assumption that the economy would slowly return to its normal functioning and accounts for the continued high defense-related budget expenditures in 2026 and the need for significant external financing over the forecast horizon. The quarterly Inflation Report for July 2025 outlines a detailed analysis and forecast of the macroeconomic situation.
The NBU forecasts a notable decline in inflation by the end of the year and its further movement toward the 5% target
As expected, the local inflation peak passed in May (15.9%), and inflation slowed significantly in June (14.3%). In July, it may rise slightly due to the unfavorable influence of weather conditions on food prices but will return to a steady downward trajectory afterward. Inflation is expected to fall to 9.7% in 2025, 6.6% in 2026, and the NBU’s target of 5% in 2027.
Core inflation will slow down over the forecast horizon, primarily due to the NBU’s monetary policy measures. Food inflation will also decline due to a gradual increase in harvests and an expansion of food supply. At the same time, administered prices inflation will remain relatively high over the forecast horizon, due to both excise tax increases in line with EU integration commitments and the objective need to adjust utility tariffs in the coming years. This, in turn, will prompt the NBU to keep other components of inflation, particularly core inflation, below the inflation target in order to achieve the headline inflation target of 5%.
The NBU will stick to a rather tight monetary stance for as long as it is needed in order to ensure that inflation is sustainably declining toward its 5% target over the policy horizon
The tightening of interest rate policy and maintaining the key policy rate at 15.5% contributed to an increase in yields on hryvnia term deposits and domestic government debt securities, which revived public interest in these instruments. At the same time, such steps by the NBU had a neutral impact on lending, which is growing steadily thanks to high competition among the banks for creditworthy borrowers.
According to baseline scenario of the NBU’s forecast, the key policy rate will not be lowered until Q4 2025. The NBU will take into account changes in the balance of risks and will only switch to an easing cycle of interest rate policy when there is compelling evidence of there being no threats to the sustainable slowdown of inflation to the target within the policy horizon, which is limited to three years.
In 2025–2027, the economy will grow by 2%–3% per year
According to the NBU forecast, the economy will grow by 2.1% this year thanks to loose fiscal policy, sustained domestic demand, and a smaller electricity deficit than last year. At the same time, the growth rate will be lower than last year (2.9%). This is a consequence of the continued destruction of production facilities, infrastructure, and housing, the deepening of negative migration trends, and the impact of unfavorable weather conditions and climate change on harvests.
The NBU’s baseline forecast scenario assumes a slow normalization of conditions for economic activity, so economic growth in 2026 will accelerate to only 2.3%. The budget deficit will remain significant, given the security risks, so fiscal stimuli will continue to be the fundamental driver of economic recovery.
In 2027, real GDP will grow by almost 3% thanks to a revival in investment and consumption. Government support for the economy will decrease, so private investment will become the main driver of economic growth. Consumption will increase amid further growth in real wages and the gradual return of migrants to Ukraine.
Sustained demand for labor will support the decrease in unemployment and the increase in wages
Unemployment is expected to gradually decline and stabilize below 10% by the end of 2027 due to high demand for labor. Wage growth will continue to outpace inflation, but will slow somewhat compared to last year as labor market mismatches gradually decrease and non-price competition among employers for workers intensifies. According to the NBU forecast, real wages will grow by about 5% per year in 2025 and 2026, and by almost 4% in 2027.
The budget deficit will be covered without resorting to monetary financing
Given the significant defense needs, the budget deficit in 2025 will be substantial, at 22% of GDP. In the next two years, budget expenditures will remain high due to the need to maintain defense capabilities and the reconstruction needs. The budget deficit in 2026 will decline slowly, to 19% of GDP, but in 2027 fiscal consolidation will accelerate (deficit at 12% of GDP).
Budget expenditures are expected to be financed from international assistance and domestic sources other than monetary financing. In addition, this year’s record inflows of external assistance (USD 54 billion) will allow building an FX liquidity buffer for the next year. External financing needs in 2026–2027 are estimated at USD 35 billion and USD 30 billion, respectively, under the baseline scenario. One-third of these funds have confirmed sources of financing.
International reserves will remain sufficient to ensure the stability of the FX market: at USD 53.7 billion in 2025, USD 44.7 billion in 2026, and USD 45.2 billion in 2027.
Alternative scenario of the forecast: Fast-paced normalization
The alternative scenario is based on the assumption of a faster (compared to the baseline scenario) decline in security risks. Under such conditions, the budget deficit will significantly narrow already in 2026 (to about 13% of GDP) and will keep shrinking in 2027 (to 7% of GDP). External financing needs to maintain defense capabilities will be lower.
The revival of private consumption and investment demand will offset the effects of fiscal consolidation, so the pace of economic recovery will accelerate to 3%-3.5% in 2026–2027. The disinflation trajectory will be close to that in the baseline scenario of the forecast, with inflation expected to reach the 5% target in 2027. Thus, faster adjustments to utility tariffs will be offset by lower core inflation due to lower production costs for enterprises. Therefore, the easing of interest rate policy will occur at approximately the same pace in both scenarios.
The forecast for international reserves does not differ significantly between the baseline and alternative scenarios. The latter envisages the reserves to amount to USD 45.3 billion as of the end of 2026 and USD 43.6 billion as of the end of 2027. A smaller structural FX deficit of the private sector is expected to minimize the effects of decreased external financing.
Apart from the updated macroeconomic forecasts, July’s Inflation Report features a number of highlights:
Ukraine and EU: Convergence of food prices
In recent years, food prices in Ukraine have approached those in EU countries. This process has been ongoing for the past decade, but was temporarily disrupted due to the weakening of the hryvnia against the euro in 2023 and 2024, when Ukrainian food prices fell in the euro equivalent amid logistical difficulties. However, convergence resumed in H1 2025, with prices for certain food products in Ukraine once again approaching those in Poland and in some cases exceeding the levels of neighboring countries (Romania, Slovakia, and Türkiye). Among the internal factors, this dynamic was caused by a significant reduction in harvests in 2024 due to unfavorable weather conditions. However, external factors also played a role, in particular the expansion of Ukrainian producers’ access to the EU market since the start of the full-scale invasion.
When internal factors are unfavorable, relatively similar food prices in neighboring countries stimulate imports of these goods. On the one hand, larger imports put pressure on international reserves and limit the opportunities for domestic producers. On the other hand, this makes it possible to curb the growth in domestic prices and generally makes them more stable.
Thus, the active integration of the Ukrainian food market into the European market has both advantages in the form of price stabilization and challenges that require the resolution of internal structural problems in order to ensure food and macrofinancial stability.
Storm and anchor: Adaptability to shocks and the long-run level anchor of inflation expectations of firms in Ukraine
Inflation expectations play a key role in shaping the central bank’s monetary policy. They influence economic agents’ decisions on consumption, investment, and savings, and largely determine the pricing by firms.
Well-anchored expectations increase the effectiveness of monetary policy, allowing the central bank to respond more mildly to adverse demand shocks and temporary supply shocks. Conversely, unanchored expectations require a faster and stronger response to reassure the public of the commitment to bring inflation to target.
Although assessments of the degree of anchoring of inflation expectations among businesses in Ukraine indicate that expectations remain moderately sensitive to price spikes, the long-run level of expectations – the so-called "anchor" – has risen significantly since the pandemic and the start of the full-scale invasion. It has reached a double-digit level of around 11.5%.
The persistent divergence between the anchor of expectations and the NBU’s target, driven by inflationary "memory," dollarization, and war-related shocks, complicates the task of ensuring price stability. At the same time, while remaining flexible in responding to challenges, the NBU adheres to a transparent and consistent monetary policy aimed at achieving the 5% inflation target. As global experience shows, following such a policy in the long term will make it possible to achieve a sustainable anchoring of expectations at the target level.
Monetary response to geopolitical shocks: How can FX interventions ease inflationary pressure?
Geopolitical shocks have become a new permanent feature of the global environment. They affect economies through both direct financial and indirect supply-and-demand channels, raising uncertainty. This complicates monetary policy implementation, as central banks increasingly face the classic dilemma: to curb inflation or to support depressed economic activity.
The presence of FX interventions in the central bank’s toolkit allows it to respond flexibly to external shocks and more effectively balance the goals of price stability and supporting economic activity. Interventions help limit the pass-through from external shocks to domestic prices through exchange rate and inflation expectations channels. At the same time, they allow central banks to pursue a looser interest rate policy without deepening the economic downturn.
This underscores the reasonability of flexibly applying a consistent combination of various monetary instruments in times of geopolitical turbulence. At the same time, the effectiveness of interventions depends significantly on the availability of sufficient international reserves and therefore requires a careful assessment of the scale, duration, and economic consequences of geopolitical shocks. Consistency, transparency, and timely response remain key principles of effective monetary policy in the new geo-economic reality.