On 6 November 2024, the National Bank of Ukraine held an online meeting with the leadership of the Ukrainian businesses that participate in the central bank’s business outlook surveys. Such regular meetings are an effective platform for informing the business community about the NBU’s latest decisions, receiving feedback, and discussing issues of importance to businesses.
"Were sincerely grateful for your strong contribution to supporting the economy and for your active participation in the NBU surveys," said NBU Deputy Governor Sergiy Nikolaychuk in his welcoming remarks at the meeting. "The results of these surveys are extremely important for the effective fulfillment of the NBU’s mandate to ensure price and financial stability. Our dialog today will allow us not only to better communicate the NBU’s policies, but also to take into account your concerns in adapting the central bank’s policies to the challenges faced by businesses."
The event gathered a record number of participants – 132 representatives of 121 companies from most sectors of the economy and from almost all of Ukraine’s oblasts. The meeting agenda as usual covered a wide range of issues: an overview of the current state of the economy and an update of the macroeconomic forecast, the situation on the FX market and the progress of FX liberalization, the sustainability of the banking sector, and so on.
Overview of the economic situation and macroeconomic forecast
In Q3 2024, the economy recovered faster than the NBU had forecast. These dynamics reflect the high adaptability of businesses to the challenges of the full-scale war, as well as lower-than-expected electricity shortages due to improved weather conditions and the faster completion of repairs in August through October. Economic activity was also supported by the stable operation of the maritime corridor and a loose fiscal policy.
Economic performance in Q3 enabled the NBU to revise its 2024 economic growth forecast upward, from 3.7% to 4.0%. In 2025 and 2026, real GDP growth will accelerate to 4.3% and 4.6% respectively.
Uncertainty over external financing has decreased significantly compared to July. This was facilitated by both the progress in formalizing the process of providing Ukraine with a non-repayable loan secured by revenues generated by immobilized Russian assets of up to USD 50 billion under the Extraordinary Revenue Acceleration (ERA) Loans program, and the confirmation of funding under the Ukraine Facility project. The project contains, along with financial assistance, a wide package of reforms related to harmonizing domestic regulations with European standards, and to Ukraine’s membership of the EU.
An increase in expected international financing inflows, to USD 41.5 billion in 2024 and to USD 38 billion in 2025, will enable the government to finance higher budget expenditures without resorting to monetary emission, while also allowing the NBU to ensure the sustainability of the FX market and to maintain a sufficient level of international reserves.
In recent months, inflationary pressures have intensified as expected: in September 2024, inflation accelerated to 8.6% yoy. The NBU’s previous forecasts predicted an increase in price pressures, but these pressures were stronger than had been expected. This was mainly due to a rise in food prices, which was driven by higher commodity prices resulting from poorer harvests. Prices were also pressured by a further increase in production costs for electricity and labor. At the same time, the inflation expectations of economic agents remained fairly stable and under control, at below 10% for all groups of respondents.
In the coming months, price pressures will persist due to the ongoing influence of food-supply-side factors, rising budget expenditures, high wage growth, and growing energy shortages during the heating season. However, inflation is expected to begin to decline in the spring, reaching 6.9% at the end of 2025, and returning to its 5% target in 2026.
Comprehensive coverage of the macroeconomic forecast is available in the October 2024 Inflation Report.
Monetary policy
The adaptation of the economy to the challenges of the war helped improve the effectiveness of monetary transmission channels. The increased efficacy and predictability of the impact of the NBU’s interest rate policy on market rates, combined with other monetary tools, made it possible to restore certain elements of the pre-war monetary policy.
Thus, in September 2024, the NBU Council approved the transition to a flexible inflation targeting (IT) regime in its Monetary Policy Guidelines for the medium term.
Under this regime, the NBU switched to a point inflation target of 5% and extended its policy horizon from 9–18 months to three years.
The NBU uses its key policy rate as an auxiliary tool to maintain exchange rate stability, including through implementing its Strategy for Easing FX restrictions, Transitioning to a More Flexible Exchange Rate and Returning to Inflation Targeting.
At the same time, the NBU will flexibly adapt its monetary policy if macroeconomic indicators deviate from expectations and if the balance of risks to inflation, the FX market’s sustainability, and economic development changes significantly.
Flexible inflation targeting is an intermediate regime that should strike a balance between keeping inflation under control and helping Ukraine’s economy adapt to the shocks of the war, while also supporting its recovery.
The NBU remains committed to its strategic intention to return to classic inflation targeting with a floating exchange rate as soon as the macroeconomic conditions are right. Prior to the full-scale invasion, this regime proved to be effective in ensuring macroeconomic stability over the long term.
Since July 2024, the key policy rate has remained unchanged, at 13%, given the reversal of the inflation trend and the existing balance of risks. The updated macroeconomic forecast assumes that the key policy rate will remain at the current level of 13% at least until the summer of 2025. If price pressures continue to grow beyond those forecast and threaten to unanchor inflation expectations, the NBU will be ready to respond with all available monetary policy tools.
Exchange rate policy
More than a year ago, the NBU was able to abandon the fixed exchange rate policy it had to introduce temporarily, and switched to a regime of managed exchange rate flexibility. This was a step towards greater maturity in the FX market and another element of the return to normalcy. The exchange rate’s dual role as an inflation control tool and an economic shock absorber helps balance short-term needs against long-term economic goals. The transition to a floating exchange rate remains a medium-term goal, achievable once the necessary macroeconomic conditions are in place.
Until then, the NBU will maintain an active presence in Ukraine’s FX market: it will offset structural FX shortages and smooth out excessive exchange rate fluctuations. Supported by the NBU, the exchange rate will fluctuate moderately in both directions in response to changing market conditions. This will enhance the adaptability of the FX market and the economy, while not preventing inflation from slowing next year and returning to its 5% target on the policy horizon.
The international reserves forecast for the end of 2024 has been revised upward, to USD 43 billion. This is a strong margin of safety, providing the ability to maintain the sustainability of the FX market, which is key to safeguarding confidence in the hryvnia and maintaining control over inflation and exchange rate expectations.
In 2024, the NBU made significant progress in easing FX restrictions: it liberalized the servicing of new and old loans, allowed the partial repatriation of dividends and transfers to pay for leasing and rent, and more.
The NBU will continue its progress using the FX Liberalization Roadmap if the necessary conditions are met. Before taking each new step, the NBU will make a thorough analysis of the impact of previous measures on the FX market and the level of international reserves. Certain urgent needs of businesses that were raised during the meeting will also be taken into account.
Sustainability of the banking sector and development of lending
The banking system is in good shape: the banks are profitable and sufficiently capitalized, meet economic ratios with a margin to spare, have stable funding, and are resuming active lending to businesses outside of government programs. Businesses’ net hryvnia loan portfolios increased by more than 20% over 12 months. Along with the increase in solvent demand and credit appetites of the banks, these dynamics are also supported by the decrease in interest rates.
The quality of the loan portfolio is improving: by 1 October 2024, the non-performing loan (NPL) ratio had decreased to 32%. Excluding old state bank loans, it is close to 20%. At the same time, this ratio is still quite high by international standards. It is necessary to ensure the implementation of the strategy for reducing the NPL ratio through improving the legal framework and creating opportunities to regulate the problem on a market basis. This is one of the elements of the Lending Development Strategy, which was approved by the Financial Stability Council in June 2024.
Among further plans is the restoration in 2025 of the practice of conducting an annual assessment of the resilience of the banking system, which will include an assessment of asset quality and stress testing under baseline and adverse scenarios, as well as the further implementation of EU standards on the way to Ukraine’s full membership of the European Union.
Reforming the banking sector contributes to the banks’ timely assessment of risks, reducing the level of uncertainty and systemic threats, and creating conditions for full-fledged lending to the economy.
During the meeting, NBU representatives – experts from the Statistics and Reporting Department, Monetary Policy and Economic Analysis Department, Financial Stability Department, and Open Markets and Financial Monitoring Department – provided detailed answers to numerous questions from representatives of the business community.
As usual, the NBU invites business representatives to participate in online surveys in the Monthly Business Outlook Surveys mobile application. This can be downloaded from Google Play and the App Store. The NBU will continue to hold regular meetings with the managers of companies that participate in business outlook surveys.