The National Bank of Ukraine expects an increase in inflation and encourages banks to be more active in covering the state budget deficit

The National Bank of Ukraine (NBU) expects an increase in inflation and is encouraging banks to be more active in covering the state budget deficit.

Today, the National Bank decided to keep its key interest rate at its previous level of 13% per annum. This was announced by the NBU Chairman, Andriy Pyshnyy, who also noted that the regulator no longer sees grounds for lowering the rate this year.

Pyshnyy reminded that the current inflation rate is at 7.5% (as of August) but will rise in the near future due to increased electricity tariffs and budget payments.

“Inflation will moderately increase in the coming months due to the expansion of aggregate demand as a result of budget expenditures, increased business expenses for labor and electricity, and higher excise taxes. However, the NBU’s balanced monetary policy and reduced external price pressure will contribute to a gradual slowdown in inflation and a return to the 5% target in the coming years. To achieve this goal, the NBU will, in particular, maintain a controlled situation in the foreign exchange market,” said the head of the National Bank.

He also outlined the current risks to the Ukrainian economy:

1. Additional budgetary needs, primarily to maintain defense capabilities.
2. Possible further tax increases, which, depending on their parameters, may intensify price pressure.
3. Further damage to infrastructure, especially energy and port infrastructure, which will limit economic activity and exert supply-side pressure on prices.
4. Deepening negative migration trends and further expansion of the labor shortage in the domestic labor market.

“There is also uncertainty surrounding future volumes of support for Ukraine from international partners, partly due to many countries focusing on their internal electoral cycles and the disruptive activities that Russia is attempting to carry out in other countries and at the level of international institutions,” said Andriy Pyshnyy.

He stated that the NBU opposes raising the profit tax for banks from the current 25% to 50%, as stipulated by draft law No. 11416-d, which the Verkhovna Rada passed in the first reading this week.

“We should not slaughter our cow. It gives a lot of milk,” Pyshnyy said metaphorically.

To cover the state budget deficit through banks, the NBU today approved stricter requirements for banks’ mandatory reserves. First, from October 11, 2024, the NBU will increase the mandatory reserve requirements by 5% (except for the standards for fixed-term deposits of individuals in hryvnia for a period of 93 calendar days or more) for various types of deposits and current accounts attracted by banks. Second, the share of mandatory reserves that banks can cover with benchmark government bonds (OVGZ) will increase from 50% to 60%.

This is expected to encourage banks to more actively buy government OVGZs and cover the state budget deficit. Andriy Pyshnyy forecasted an increase in demand for government bonds from banks at around 216 billion UAH.