According to the NBU’s updated forecast, inflation will rise in the coming months, but will start to decline already from the middle of the year. It will reach 8.4% by the end of 2025 and will return to the NBU’s 5% target by 2026. Real GDP will increase by 3.6% this year, and over the next two years, economic growth will accelerate to about 4% per year.
The baseline scenario of the NBU’s forecast is based on the assumptions that sufficient volumes of international support would be maintained and that the economy’s functioning conditions would gradually normalize, which would, among other things, facilitate the return of a part of forced migrants and promote growth in investment. The detailed analysis and macroeconomic forecast can be found in the quarterly Inflation Report for January 2025.
The NBU’s interest rate policy is aimed at lowering inflation this year and bringing it down to the 5% target further on
The NBU made two key policy rate hikes – by 0.5 pp in December and by 1 pp in January – to support the sustainability of the FX market, keep expectations under control, and gradually bring inflation to the 5% target over the policy horizon. The NBU’s forecast envisages further tightening of interest rate policy in H1 2025 to rein in the price pressure.
The increase in the key policy rate will encourage the banks to raise interest rates on hryvnia deposits, which will provide better protection of hryvnia savings from inflation. This will also help improve inflation expectations and will partially reorient households’ spending from consumption and purchases of foreign currency to hryvnia savings. As a result, the pressure on the FX market and on prices will subside.
Despite the expected decline in international financing in the coming years, the level of international reserves will remain higher than before the full-scale invasion and will be sufficient for the NBU to continue maintaining FX market sustainability. This will support the NBU’s ability to achieve inflation target over the policy horizon.
Inflation will peak in Q2 and then will start to decline
The acceleration of inflation in the coming months will reflect a limited supply of food products due to last year’s weaker harvests, as well as higher production costs, including the costs of energy supply and labor. However, this trend will not last long. Inflation is expected to peak in Q2 and start to decline from the middle of the year. The NBU forecasts that inflation will slow to 8.4% at the end of 2025.
The NBU’s interest rate policy measures, the sustainability of the FX market, an increase in food supply as the new harvest arrives to the market, the narrowing of the fiscal deficit, and moderate external price pressures will help slow inflation. Labor market mismatches will weigh on prices, but the contribution of this factor will gradually decline as wage growth decelerates. In addition, businesses’ investments in energy independence have largely already been reflected in prices, so amid an expected decline in energy shortages, this factor will also help reduce inflation.
As conditions for the economy’s functioning gradually normalize, the situation in the energy sector and the labor market continues to improve, the budget deficit decreases markedly, and the NBU’s monetary policy measures produce their effects, consumer inflation will return to the NBU’s target of 5% in 2026.
Economic growth will accelerate to 3.6% in 2025, and reach around 4% in the coming years
The economy will grow thanks to investments in rebuilding energy and production capacities, loose fiscal policy, a pickup in domestic demand, and increased production due to higher harvests. As the economy returns to normal functioning, migrants will also begin to gradually come home, which will also support GDP growth.
Real GDP is now close to its potential level and will remain close to it going forward. Potential GDP will grow thanks to higher productivity. However, the pace of growth will be restrained by the fallout from the war – in particular, by labor shortages and limited investment in production capital.
Employment and wages will gradually rise on the back of labor shortages and economic revival
Driven by strong demand for labor, unemployment will decline, but will remain higher than before the full-scale invasion (at around 10%–11% in 2025–2027) because of the persistence of significant mismatches between employers’ needs and the skills and capabilities of potential employees. At the same time, wages will continue to rise given the high competition for skilled workers among businesses.
According to the State Statistics Service of Ukraine, in 2024, real wages have already exceeded the level recorded before the full-scale invasion in most sectors of the economy. Wages are expected to continue to grow, although as the situation on the labor market gradually improves, their annual rate of increase in real terms will decelerate to 3%–4% in 2025–2027.
Support from international partners, combined with borrowing in the domestic debt market, will make it possible to cover the budget deficit without resorting to monetary financing
The consolidated budget deficit, excluding grants, will gradually narrow within the forecast horizon (to 7% of GDP in 2027, down from 19% in 2025) thanks to the strengthening of the domestic resource base as the economy continues to grow. International aid, coupled with borrowing from the domestic market, will help finance budgetary needs without resorting to monetary financing. Ukraine expects to receive USD 38.4 billion from its international partners this year. The risk of the anticipated financing not being disbursed in full is low. International financing may actually increase or arrive sooner than projected.
In addition to the updated macroeconomic outlook, the January Inflation Report features a number of special topics:
- Factors that caused a deviation of inflation from its target in 2024
In December 2024, consumer inflation hit the 12.0% yoy mark, and core inflation came in at 10.7% yoy. Although the H2 2024 uptick in price growth had been expected, its actual rate exceeded the NBU’s previous forecasts. Inflation deviated from the NBU’s target of 5% for a number of reasons, primarily short-lived ones.
Specifically, adverse weather led to low harvests last year, reducing the food supply. The impact of underlying factors also intensified through further increases in the business costs of energy and labor. In addition, electricity tariffs for households were hiked, as were some of the excise taxes.
Monetary policy measures restrained inflationary pressures. Decisions to keep the key policy rate at 13% and raise it to 13.5% in December, along with steps to ensure the sustainability of the FX market, restrained the worsening of exchange rate and inflation expectations and supported the attractiveness of hryvnia savings instruments. Furthermore, the hryvnia strengthened against the euro at the end of the year, which slightly relieved price pressures.
The cost to households of some of the utilities (natural gas, heating, hot water) remains below the level that would be consistent with global gas prices. Accordingly, the moratorium on raising tariffs for certain utilities also had a restraining effect on the acceleration of inflation.
- Parameters of the state budget in 2025
The State Budget of Ukraine for 2025 was approved with a deficit of 20.4% of GDP, excluding grants in revenues. Defense is a key expenditure item, with spending on defense and security making up 26% of GDP. The planned state budget deficit in 2025 is lower than the actual figure for 2024. However, fiscal policy will remain quite loose to support the economy in wartime, while gradual fiscal consolidation will help stabilize public debt.
The state budget’s main parameters are based on rather conservative projections. On the one hand, because the levels of inflation and imports that were factored into the budget are higher than those in the NBU’s forecast, risks of shortfalls in tax revenues exist. On the other hand, the government’s estimate of economic growth and hence of nominal GDP is more conservative compared to the NBU’s forecast. At the same time, budget revenues and expenditures remain sensitive to both military operations and other potential shocks.
The state budget deficit is expected to be financed almost entirely by international aid, meaning the need for external financing will remain significant. However, uncertainty around aid volumes has considerably cleared up thanks to the ERA Loans mechanism.
On top of that, the planned volume of net domestic borrowing for 2025 is very moderate, indicating a balanced approach to the domestic debt market’s capabilities and the burden on debt-servicing expenditures. There is room to raise more funding for contingencies.