At its 11 September 2024 meeting, the NBU Council approved the Monetary Policy Guidelines for the medium term (hereinafter referred to as the “Guidelines”). The Guidelines define the goals, tasks, and principles of monetary policy, as well as the specifics of the use of monetary instruments during the full-scale war and for some time into post-war recovery.
The document is based on the NBU Board’s proposals and aligned with the objectives and principles of the previous version of the Guidelines and the current Strategy for Easing FX Restrictions, Transitioning to Greater Flexibility of the Exchange Rate, and Returning to Inflation Targeting (hereinafter referred to as the “Strategy”). The Guidelines also draw on the Memorandum of Economic and Financial Policies with the IMF.
NBU will use a regime of flexible inflation targeting to maintain price stability
The NBU had de facto switched to such a regime in H1 2024 already. In particular, the central bank announced its intention to maintain a moderate rate of inflation in 2024 and return it to its 5% target in the coming years. This shift was preceded by a successful transition to managed flexibility of the exchange rate, a strengthening of the key policy rate’s role as the level of economic uncertainty decreased, an upgrade of interest rate policy’s operational design, and other measures taken by the NBU.
From now on, the Guidelines officially stipulate that the NBU’s monetary policy is aimed at bringing inflation to its target of 5% within a policy horizon that will not exceed three years. Such a policy horizon – the time during which the NBU intends to drive inflation back to its target – will be determined flexibly. The length of the policy horizon will depend on the need to keep a balance between facilitating the adjustment of the economy and maintaining its recovery, as well as keeping inflation expectations in check.
This format will be what distinguishes the current regime from the full-fledged inflation targeting that was in place before the full-scale war, when it used to take 9–18 months to bring inflation back to its target. The NBU plans to use flexible inflation targeting to normalize the economy’s functioning and restore inflation targeting to its full format with a floating exchange rate.
NBU will apply a consistent combination of interest rate and exchange rate policy instruments, FX restrictions, and other tools to ensure price stability
Work to increase the effectiveness of monetary transmission channels will continue in order to strengthen the key policy rate’s role as a monetary policy instrument. To this end, the NBU will make efforts to reduce economic uncertainty, maintain confidence in hryvnia instruments, calibrate the parameters of the operational design of interest rate policy, and gradually ease FX restrictions in line with the Strategy.
On the way back to a floating exchange rate, the NBU will continue to pursue a transitional regime that operates on the principles of managed flexibility of the exchange rate. It will remain one of the NBU’s important tasks to maintain sustainable and controlled conditions in the FX market, as well as to allow two-way fluctuations of the exchange rate. This will help keep inflationary and exchange rate expectations under control, maintain confidence in the hryvnia, and protect international reserves. At the same time, the gradual strengthening of the link between the exchange rate and the market situation will make it possible to reinforce the exchange rate’s role as a shock absorber, improve awareness of FX risks, and contribute to increasing the Ukrainian economy’s resilience to domestic and external changes.
In addition, the NBU will help maintain real interest rates on hryvnia-denominated term instruments, deposits in particular, at a sufficiently high level to ensure that households’ hryvnia incomes are protected against inflation. This is an important part of minimizing risks to the sustainability of the FX market and the manageability of inflation expectations.
NBU will also make efforts to support economic recovery and the government’s economic policy
Safeguarding monetary stability and reducing economic uncertainty will continue to be the NBU’s main contribution to sustainable economic growth and the revival of lending. As before, this will in particular be achieved by maintaining a sustainable and controlled situation in the FX market and creating an environment with low and stable inflation, as well as keeping the banking system resilient.
An important role will also be played by the approved Lending Development Strategy. It outlines measures to support demand for loans and places the focus on lending to the country’s priority sectors in order to ensure that the economy is competitive and recovers in a sustainable way.
The NBU will work closely with the government to help it raise external financing and implement reforms in Ukraine. Guided by European integration aspirations, the NBU will do its best to meet the monetary policy criteria for joining the EU. The NBU will also continue to fulfill the goals, criteria, and measures envisaged by cooperation with the IMF and other IFIs and EU institutions.
The previous Monetary Policy Guidelines, approved on 15 April 2022, made it possible to overcome the first shocks of russia’s full-scale war against Ukraine and ensure macrofinancial stability and the smooth operation of the banking system and critical financial infrastructure. The 2022 Guidelines also laid the groundwork for decisions that helped to further develop the banking and nonbank sectors, reduce economic uncertainty, and preserve confidence in the hryvnia.
With macrofinancial conditions gradually adjusting to martial law, it is viable to update the Guidelines in order to improve the clarity and preserve the consistency of the NBU’s monetary policy, as well as to reduce economic uncertainty.