The National Bank of Ukraine increased the discount rate to 13.5%

The Board of the National Bank of Ukraine (NBU) decided to raise the discount rate to 13.5% per annum. This is done to gradually slow down inflation to 5%.

This was reported by the press service of the regulator.

In recent months, inflation has grown at a faster rate than predicted by the NBU forecast.

For example, in November, inflation accelerated to 11.2% in annual terms. On the one hand, the consequences of the limited supply of food due to this yearʼs worse harvests remained a significant driver of price growth. It is expected that the impact of this factor on inflation should level off next year with the arrival of the new harvest.

On the other hand, the inflationary spike is increasingly acquiring fundamental characteristics, which is confirmed by the further acceleration of core inflation (up to 9.3% y/y in November). This is due, in particular, to an increase in production costs, including electricity and labour costs, as well as exchange rate effects due to the weakening of the hryvnia in previous periods.

Inflation is likely to continue to rise in the coming months due to the further impact of food supply factors, substantial budget expenditures, significant wage growth rates, and higher energy deficits during the heating season.

However, in the future, inflation should slow down against the background of a gradual improvement in the situation in the energy sector and an increase in harvests. This will also be facilitated by the NBUʼs monetary policy measures and the expected easing of external price pressure.

What is the discount rate

The accounting rate is one of the main indicators of the economy. This is the percentage at which NBU provides funds to banks and, accordingly, below which it is unprofitable for commercial banks to give loans to clients. Thanks to the discount rate, NBU affects inflation (price growth).

A decrease in the interest rate makes loans more accessible (because the interest on them becomes lower), in connection with which banks begin to issue more money, there is more of it in the economy, and when there is more money, inflation gathers momentum. In this case, there is less money in deposits, and more money in hand — accordingly, people spend more.

But higher inflation actually leads to a devaluation of the hryvnia, because for the same amount, with rising prices, you can buy fewer goods.

And all this also works the other way around — when the rate rises, loans and deposits become more expensive, they stimulate the population to save more. As a result, there is less money in the economy, and inflation is slowing down.

• At the beginning of the war, the National Bank decided not to change the discount rate, leaving it at 10%, but on June 2, 2022, NBU sharply increased the rate to 25%, which became one of the most drastic increases in history. In the future, the National Bank of Ukraine reduced the discount rate several times, until it reached 13% in June.

For more news and in-depth stories from Ukraine please follow us on X.