NBU expects inflation rate to remain around 5% in H1 2024

The relevant statement was made by the NBU’s press service, following a meeting of the NBU Board on monetary policy issues, an Ukrinform correspondent reports.

In February 2024, the inflation rate slowed down to 4.3% in annual terms. Among other things, this was facilitated by higher supply of some food products and effects from last year’s strong harvests, the NBU noted.

“Core inflation also decelerated to 4.5% in annual terms. Stable foreign exchange market conditions – among other things, owing to the NBU’s monetary policy and currency supervision measures – improved inflation and exchange rate expectations across the majority of respondent groups. This reined in underlying price pressures. The official and cash exchange rates became almost equal, and the hryvnia exchange rate fluctuated moderately in both directions, which was in line with the managed exchange rate flexibility,” the report states.

According to the NBU’s forecast, inflation will remain within the target range of 5% ± 1 pp in the coming months and will accelerate only moderately in the second half of 2024.

At the same time, the inflation pressure will be fueled by a gradual rise in the income of Ukrainians and higher business costs amid the war.

However, some utility tariffs being frozen and the NBU’s monetary policy aimed at supporting the attractiveness of hryvnia assets and exchange rate sustainability will continue to curb growth in consumer prices.

“The course of the full-scale war continues to be the key risk to inflation dynamics and economic development. […]The protracted war would slow economic recovery and make it more difficult for the NBU to keep inflation close to the 5% target in 2025-2026,” the NBU explained.

The risk of insufficient international financing also persists, but positive developments have been seen recently in this regard, the NBU mentioned. A rise in external assistance inflows in the near future will allow Ukraine to significantly increase its international reserves.

Among other relevant risks, the NBU analysts noted the emergence of additional budget needs to maintain defense capabilities or cover substantial quasi-fiscal deficits, namely in the energy sector, as well as the continuation of the partial blockade of freight transportation at border crossings with some EU countries, lowering exports and making imports more expensive.

“On the other hand, positive scenarios could also materialize. Thus, a significant expansion of the capacity of the maritime corridor could help Ukraine’s exports recover faster, and given the enhanced effectiveness of currency supervision measures, increase foreign exchange earnings. The implementation of large-scale reconstruction projects in Ukraine could give considerable impetus to economic recovery,” the NBU emphasized.

Additionally, discussions have recently intensified about the use of immobilized Russian assets in Ukraine’s favor. The implementation of such initiatives could significantly improve the key macroeconomic indicators, the NBU concluded.