The NBU's monetary committee indicates that the key interest rate will need to be raised further.

In the current context, a significant tightening of monetary policy is essential to maintain the stability of the currency market, keep inflation expectations in check, and steer the inflation trend towards a sustainable decline to the target.

This was stated in the outcomes of the Monetary Policy Committee (KMP) meeting of the National Bank of Ukraine (NBU), during which the decision to raise the discount rate to 14.5% was supported.

One of the KMP members justified the decision primarily by the noticeable strengthening of fundamental factors affecting price dynamics in recent months. He pointed out that the substantial acceleration of service inflation is one indicator of significant internal pressure and a clear sign that the current price surge is driven by factors that are far from being temporary.

"Several other discussion participants emphasized that the risk balance for inflation remains skewed upwards. They noted the persistence of high security threats and a considerable number of external inflationary risks (related, in particular, to the potential intensification of geopolitical polarization among countries and, consequently, the fragmentation of global trade)," the statement said.

Furthermore, it is highlighted that most committee members see the need for further tightening of monetary policy to ensure the appropriate attractiveness of hryvnia assets, keep inflation expectations under control, and return inflation to a trajectory of sustainable slowdown.

It is noted that several of them remarked that for this purpose, the NBU would need to not only raise the discount rate but also possibly adjust the parameters of the operational design of monetary policy "to enhance competition among banks for term deposits from the public in hryvnia."

"The discussion participants suggested that if signs of a sustainable easing of price pressure emerge, the NBU could return to cautious rate reductions already this year. However, considering the still high level of uncertainty for the economy amid the war and the upward-shifted risk balance for inflation, the rate forecast may be revised upwards," the NBU added.

Background. Previously, Mind reported that the National Bank raised the discount rate to 14.5%. The NBU's macroeconomic forecast anticipates further increases in the discount rate to curb inflation.