The National Bank of Ukraine raised the discount rate from 10% to 25%

The National Bank of Ukraine (NBU) decided to raise the discount rate two and a half times - from 10 to 25%. The message about the increase was published on June 2 on the website of the Ukrainian regulator.

The report states that the bank considered several possible scenarios for the development of events and decided that in the current conditions it is necessary to raise the rate immediately by 15 percentage points. The main reason is high inflation expectations.

“A slight increase in the key rate, according to the estimates of the National Bank, would not have a significant impact on the financial and economic system. Firstly, this is due to the limited effectiveness of the mechanism of monetary transmission during the war. Secondly, this would form the expectation of further increases in the discount rate and, accordingly, a wait-and-see attitude of depositors and a slight interest in hryvnia assets. Thirdly, in order to revive interest in hryvnia assets, their profitability should exceed the expected inflation rates,” the bank said.

Inflation in the Ukrainian economy, according to the NBU, in April accelerated to 16.4% year on year. Over the month, prices rose by 3.1%. According to preliminary estimates of the National Bank, inflation continued to accelerate in May.

“A decisive increase in the discount rate will revive interest in hryvnia assets, reduce pressure on international reserves and have a restraining effect on inflation,” the NBU said.

“Inflationary development requires the return of the National Bank to an active interest rate policy to prevent further deterioration of inflationary expectations and dollarization of the economy,” the regulator said.

According to the Ukrainian authorities, since the beginning of Russia's special military operation, Ukraine has lost about 20% of its territory, including important industrial centers. According to Prime Minister Denys Shmygal, the damage to the country's economy after February 24 amounted to $600 billion.

The European Bank for Reconstruction and Development (EBRD) announced on May 10 that Ukraine's GDP could fall by 30% in 2022. The bank downgraded its forecast for the country compared to March, when a 20% drop was expected.

The EBRD forecasts that GDP growth in Ukraine will recover to 25% in 2023, but this suggests that substantial recovery work will have begun by then.

Russia's GDP in 2022 could fall by 10%, the bank warned.