Ukraine cuts key rate to 22% during wartime

Ukraine cuts key rate to 22% during wartime

Ukraine’s Central Bank Cuts Key Rate to Boost Economic Recovery

In a surprising move aimed at spurring economic recovery, Ukraine’s central bank has announced a wartime rate cut, lowering its key rate to 22% from the previous 25% set in June 2022¹. This decision comes as a result of a fast slowdown in inflation and a stable situation in the foreign exchange market². The central bank stated that reducing the discount rate while maintaining macro-financial stability will contribute to the revival of the economy³. Consumer price inflation has also slowed down to 12.8% year-on-year in June, according to data from the state statistics service⁴.

The central bank has not stopped at just reducing the key rate. It has also lowered rates for deposit certificates by two percentage points to 18%, and on refinancing credits by three percentage points to 24%⁵. These measures indicate the bank’s concerted efforts to stimulate economic activity and encourage investment in the country.

One of the significant reasons behind the central bank’s confidence in the economy’s resilience is the ongoing conflict with Russia since February 2021⁶. Andriy Pyshnyi, the governor of the central bank, mentioned that Ukraine’s economy has proven to be remarkably resilient to the challenges posed by the full-scale invasion launched by Russia⁷. As a result, the central bank has revised its forecast for gross domestic product (GDP) growth from 2% to 2.9% for this year⁸. Additionally, the bank has improved its inflation forecast, expecting the rate to slow down to 10.6% instead of the previously estimated 14.8%⁹.

Uncertainty Surrounding the Grain Corridor

Deputy governor Serhiy Nykolaichuk shed light on the central bank’s economic forecast, emphasizing their assumption that the Black Sea grain export corridor, which was established under a U.N.-brokered deal and recently abandoned by Russia, will not function during martial law¹⁰. With this in mind, the central bank sees alternative export routes via Central Europe as crucial for Ukraine’s grain sector¹¹. While the ongoing conflict may present challenges, Pyshnyi expressed optimism, foreseeing security risks receding by mid-2024. This would open up opportunities to revive optimal logistics routes, promote increased production, and boost harvests¹².

Looking ahead, the central bank expects the pace of economic recovery to accelerate. It forecasts GDP growth by 3.5% in 2024 and a significant jump to 6.8% in 2025¹³. In terms of inflation, the bank anticipates a slowdown to 8.5% in 2024 and further down to 6% in 2025¹⁴. These projections are encouraging indicators for Ukraine’s economic future.

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However, Pyshnyi emphasized that uncertainty remains and highlighted the importance of cooperation with the International Monetary Fund (IMF)¹⁵. Ukraine heavily depends on Western aid to finance its budget spending¹⁶. As of now, Kyiv has received nearly $27 billion out of an expected $42 billion this year, and it will require at least $37 billion in the coming year to cover its budget deficit¹⁷. Maintaining strong ties with the IMF is crucial for ensuring financial stability and continued economic growth in Ukraine.

Currently, Ukraine’s foreign exchange reserves are at a record high of approximately $39 billion as of July¹⁸. The central bank expects these reserves to ease slightly to $38.3 billion by the end of 2023 but then grow to $42.6 billion in 2024 and $44.1 billion in 2025¹⁹. These reserves will play a vital role in supporting the economy during these transformative years.

Overall, Ukraine’s central bank’s decision to lower the key rate and implement other monetary measures demonstrates its commitment to boosting economic recovery and fostering resilience. With improved GDP and inflation forecasts, as well as ongoing efforts to secure international financial support, Ukraine is poised for a brighter economic future.

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