Summary of Key Policy Rate Discussion by NBU Monetary Policy Committee on 23 July 2025

Meeting date: 23 July 2025.

Attendees: all 11 members of the Monetary Policy Committee (MPC) of the National Bank of Ukraine:

• Andriy Pyshnyy, Governor of the National Bank of Ukraine
• Kateryna Rozhkova, First Deputy Governor
• Yuriy Heletiy, Deputy Governor
• Yaroslav Matuzka, Deputy Governor
• Sergiy Nikolaychuk, Deputy Governor
• Dmytro Oliinyk, Deputy Governor
• Oleksii Shaban, Deputy Governor
• Pervin Dadashova, Director, Financial Stability Department
• Volodymyr Lepushynskyi, Director, Monetary Policy and Economic Analysis Department
• Oleksandr Arseniuk, Director, Open Market Operations Department
• Yuriy Polovniov, Director, Statistics and Reporting Department.

MPC members discussed the revised macroeconomic forecast featuring a slower decline in inflation, changes to the balance of risks to inflation dynamics and economic development, and monetary conditions needed to bring inflation to its 5% target within the policy horizon

Inflation resumed its decline in June (14.3% yoy) as expected, but was running above the rate projected in the April 2025 Inflation Report, the MPC members said during the discussion. By the NBU’s early estimates, the inflation trajectory in July continued to outrun the previous forecast in what was probably a slight acceleration, but only for a short while. The main driver of these developments was the impact of adverse weather on new harvests and thus on the cost of food.

Meanwhile, core inflation in recent months has been decreasing faster than expected (to 12.1% in June, according to SSSU data, and further down in July, according to an NBU nowcast). The weakening of underlying price pressures was due to both a certain narrowing of consumer demand as real income growth slowed and the effects of previous monetary policy measures, including steps to make hryvnia savings more attractive and maintain the sustainability of the FX market.

Specifically, the tightening of the NBU’s interest rate policy in December 2024 and early 2025, as well as the maintenance of the key policy rate at 15.5%, ensured an appropriate increase in the profitability of hryvnia term deposits and domestic government debt securities and revived demand for these instruments. Among other things, this contributed to a decrease in FX demand from households and to an overall weakening of pressure on the FX market and international reserves. Exchange-rate and inflation expectations of economic agents remained under control. All of this restrained inflationary pressure in H1.

However, a number of inflation risks have materialized in recent months. Spring frosts and a summer drought delayed the harvest and worsened the outlook for this year’s crops, which will affect food supply and prices. A depreciation of the hryvnia against the euro that has already occurred has not had a significant impact on inflation so far, but will gradually feed through into prices in the next few quarters. In addition, war-driven losses have risen, particularly in the energy sector, and there has been a general deterioration of the security situation, while the pass-through of businesses’ costs to prices is more substantial than was expected in April. Considering all of the above, the NBU has revised its forecast for inflation. It is now projected to decrease more slowly, to 9.7% in 2025, to 6.6% in 2026, and to the 5% target in 2027. The updated forecast delays the achievement of the inflation target by another year.

What is more, the balance of risks to inflation developments has shifted upward significantly. That includes the risk of external financing being insufficient, which continues to matter, especially if security risks abate slowly. Ramped-up russian strikes against Ukrainian infrastructure and civilian targets pose additional risks to both inflation and economic growth. Adverse weather and likely poorer harvests going forward are also increasing risks to price developments, including through a slower decline in food inflation. Furthermore, there is a risk of external conditions becoming less favorable as geopolitical uncertainty and deglobalization intensify and heightened volatility in global commodity and financial markets persists.

All MPC members favored maintaining the key policy rate at 15.5% in July

The discussion participants agreed that given the slower-than-expected actual decline in inflation and the materialization of a number of pro-inflationary factors (which pushed back the attainment of the inflation target to 2027, which still is within the policy horizon), the NBU should maintain sufficiently tight monetary conditions for longer. This is important for avoiding an unanchoring of in inflation expectations amid a more moderate decline in inflation.

Current monetary conditions are sufficient for sustainably reducing inflation to the target within the policy horizon, the participants said. Evidence that supports this assertion: underlying price pressures are showing signs of a steady weakening, FX market conditions remain sustainable, exchange-rate and inflation expectations are under control. Various groups of respondents, including financial market participants, have said in surveys that keeping the key policy rate at 15.5% is the most anticipated and appropriate step to take. Accordingly, such a decision will have no negative impact on how expectations evolve. Nor will it undermine confidence in monetary policy.

Several MPC members said that although under current circumstances the NBU could even further tighten its interest rate policy to drive inflation to the target more quickly, the maintenance of the key policy rate at 15.5% provides an optimal balance between the goals of reducing inflation and supporting economic growth. The revised forecast assumes the 5% inflation target will be achieved within a three-year horizon, which is consistent with the principles of flexible inflation targeting. Letting the key policy rate stay at 15.5% will not have the kind of additional restraining impact on lending that pursuing a tighter course of action would have. Lending developments continue to be positive, in part due to intense competition among banks for quality borrowers. Specifically, the cumulative increase in net hryvnia loans to businesses year-to-date is about 20%. This lending supports the economic recovery. 

A slight tightening of interest rate policy would not be enough to tangibly accelerate disinflation at this time, one of these participants explained. Achieving the 5% inflation target in 2026 would require a sizable rate raise, leading to significant losses to economic growth. Another way to attain the target sooner is for the NBU to strengthen the hryvnia by ramping up FX interventions. But this path is short-sighted because of risks of reserves being rapidly depleted and the hryvnia depreciating further and having detrimental effects on price dynamics.

Opting for such tactics would contradict the basic strategic principles at the core of the current regime of flexible inflation targeting. This regime actually allows the NBU to balance between different monetary policy objectives while maintaining control over inflation expectations. Because the latter condition is met, the NBU should avoid overdoing it by tightening interest rate policy.

Two participants also said it would be too early to hike the key policy rate now, as the balance of risks is highly likely to improve in the medium term despite there being increased short-term threats.  A better balance of risks may also be facilitated by an expansion of food supply that would be partly driven by a higher-than-expected harvest of late vegetables and fruits and by gains in meat production amid attractive price conditions abroad.

An important role in restraining price pressures will also be played by a notable convergence of domestic prices toward the European market that has occurred in recent years (more in the box Storm and Anchor: Adaptability to Shocks and the Long-Run Level Anchor of Inflation Expectations of Firms in Ukraine, July 2025 Inflation Report). These MPC members therefore assumed that inflation next year would more likely be lower than in the NBU’s forecast, rendering it unfeasible to raise the key policy rate now and making more room for the NBU’s monetary policy in the near future.

Two other MPC members disagreed with this conjecture, saying that inflation risks will prevail in the medium term as well. And those include not only new hypothetical damage from the war, but also other potentially significant challenges, such as securing sufficient external financing, especially now that geopolitical uncertainty is rising and the world’s attention is being diverted away from russian aggression. To meet its financial needs for the coming years, Ukraine should effectively work through all issues of future cooperation with international partners, both the IMF and other institutions and countries.

There also are multiple additional challenges that, while smaller in scale, present material risks to the inflation forecast, these discussion participants said.  Those challenges include effects from the termination of the preferential trade regime with the EU that are on the one hand potentially conducive to a short-term expansion in domestic supply but on the other could result in lower FX earnings by exporters further down the road or cause them to incur higher costs. A further strengthening of the euro against the U.S. dollar is also a tangible risk. Were it to materialize, consumer prices would face upward pressure coming through from the exchange rate channel. And a situation where it becomes necessary to import increasingly more energy and related equipment is also quite possible, considering the risks associated with russian strikes on Ukraine’s vital infrastructure.  

One of these MPC members summarized their line of argument by saying that it is basically too early to think about an easing of interest rate policy. Lowering the key policy rate now that the inflation forecast is less favorable would certainly look like empty optimism. This participant also reminded everyone that inflation expectations, though relatively sustainable, are still significantly removed from the NBU’s target and, for most economic agents, remain higher than the NBU’s forecast. Which means that a move to relax interest rate policy or even a hint at deeper cuts to the key policy rate in the months ahead would come as a sudden break with the NBU’s previous communications that could be seen as a 180-degree policy reversal, potentially dealing a tough blow to expectations and the central bank’s credibility.

Not only should the NBU hold the key policy rate steady for now, this MPC member said, but it should also communicate an unwavering resolve to respond to new pro-inflation challenges. The NBU’s commitment to its mandate to ensure price stability should also be reinforced by maintaining consistent policy in the FX market as part of managed flexibility of the exchange rate. Market trends should continue to shape exchange rate dynamics, but the NBU should smooth out excessive exchange rate fluctuations by making interventions. The role of this tool in the current environment is extremely important (for more about using FX interventions amid geopolitical shocks, see the box Monetary Response to Geopolitical Shocks: How Can FX Interventions Ease Inflationary Pressure? in the July 2025 Inflation Report) in the context of both keeping expectations in check and ensuring a sustainable decline in inflation.

MPC members expect the interest rate easing cycle to resume by year’s end, but, considering changes in the balance of risks to price developments, are inclined to pursue more moderate and less frequent cuts to the key policy rate than previously assumed

A resumption of the interest rate easing cycle will be possible only after the NBU is convinced there are no threats to a sustainable slowdown in inflation to the 5% target, the participants said. This will probably happen going into the end of the year, as soon as Q4, when inflation locks into a downward-sloping trajectory and the prospect of there being sufficient financing for the upcoming years becomes more certain, the MPC members said.

The MPC members also agreed that given the inflation forecast’s revision toward a slower decline and the increased likelihood of additional inflationary risks materializing, the scope for easing interest rate policy will be limited. The vast majority of participants anticipate the key policy rate to be at 14.5% at end-2025 and to edge lower during 2026 to about 12.5%.

Several MPC members suggested a more expedited easing of interest rate policy in 2026, particularly if the impact of pro-inflationary factors on the supply side ebbs more significantly than currently expected. However, even if events take such a favorable turn, the wiggle room for lowering the key policy rate will still be restricted, as price pressures will continue to be significant regardless of whether security risks remain elevated or wane substantially, they said.

In contrast, several MPC members said the NBU should not rule out the possibility of a tighter interest rate policy than projected in the July forecast. The materialization of new pro-inflation risks may jeopardize the achievement of the 5% inflation target within the policy horizon, requiring the NBU to take more decisive action to keep inflation processes under control and maintain confidence in monetary policy, these MPC members said.

The participants concurred that the pace of key policy rate cuts faces high uncertainty and is data-dependent.