NBU's Financial Stability Measures and Inflation Control During the War
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NBU’s policy ensuring financial stability during the war
Throughout the conflict the National Bank of Ukraine has remained active and effective in ensuring financial and exchange rate stability and has controlled inflation by hiking interest rates to 25%. In 2022, a part of the extraordinary public needs was monetised by the NBU, but the impact of these interventions was broadly neutralised by mopping up the liquidity of the banking sector.
In recent months, Ukraine has benefited from declines in global energy commodity prices and the inflation rate is dampened by the high statistical base.
CPI inflation slowed to 17.9%YoY in April, from 21.3% in March and 26.6% back in December. Core inflation slowed as well from 19.8% in March to 16.9% in April. Given heightened wartime uncertainty, we expect the NBU to wait for a more decisive period of disinflation and start interest rate cuts in early 2024.
Inflation and NBU policy rate (%)
Fiscal and external accounts driven by external aid
Ukraine’s huge public and external financing needs have been met by foreign grants and loans, including a new four-year IMF programme of US$15.6bn.
In 2022, the fiscal balance reached almost 17% of GDP, without grants it was around 10% of GDP higher. A near 30% collapse in exports and fall in imports of less than 5% led to a huge trade gap but sizeable current account surplus as the gap was compensated for by foreign grants.
From 2023, the CA is expected to post a large deficit but accompanied by rising FDI flows.
The fiscal position is set to deteriorate further this year but improve gradually in the medium term. Nonetheless, the country will continue to rely heavily on donors’ support for internal defence, provision of social services and ensuring macroeconomic stability.
Fiscal and current account balance (% of GDP)
