Ukraine’s Central Bank Reduces Key Policy Rate Amid Slowing Inflation

Ukraine’s National Bank has lowered its benchmark interest rate from 15.5% to 15% in a strategic shift aimed at supporting the country’s economic adaptation to ongoing wartime pressures and responding to easing inflation, the central bank announced Thursday.

Monetary Policy Adjustment

The decision to cut the key rate reflects momentum in inflation slowing and a clearer outlook on international financial backing for Ukraine this year. The rate change marks the beginning of a potential monetary easing cycle after a period of holding rates steady.

Governor Andriy Pyshnyi stated that the central bank’s Monetary Policy Committee took into account persistent declines in price pressures and reduced external financial risk when deciding on the cut. He emphasized the importance of supporting lending growth, especially as credit extended by banks has expanded significantly year-on-year.

Inflation Trends Supporting the Decision

Consumer price inflation in Ukraine slowed to 8% year-on-year in December 2025, and analysts expect inflation to continue its downward trend into January and beyond. This deceleration in inflation gave policymakers the confidence to ease monetary conditions for the first time in several meetings.

Despite the slowdown, the National Bank cautioned that inflation expectations remain elevated due to ongoing damage to energy infrastructure caused by intensified Russian attacks. The disruption of energy supply channels continues to exert upward pressure on prices in some sectors.

Economic Growth Outlook

Ukraine’s central bank expects the economy to grow modestly in 2026, projecting a 1.8% increase in gross domestic product, similar to the growth rate seen in 2025. However, lingering energy deficits and related challenges are expected to restrain broader economic activity.

Governor Pyshnyi noted that the difficult conditions in the energy sector will continue to weigh on business activity and production, making supportive monetary policy an important tool in helping firms and households adjust.

Foreign Exchange and Reserves

The National Bank highlighted that Ukraine’s foreign exchange reserves are currently at a historic high, standing at $57.3 billion. Officials expect reserves to grow to around $65 billion by year-end, thanks to ongoing financial support from foreign partners and loan discussions.

Maintaining strong foreign exchange reserves is critical for stabilizing the hryvnia and meeting import demand, particularly for energy equipment and fuel, which have increased due to reconstruction efforts and higher energy consumption needs.

International Financial Support

Ukraine is receiving significant financial assistance from the European Union, which plans to provide €90 billion ($105.46 billion) in support over the course of this year and next. In addition, the country is in talks with the International Monetary Fund (IMF) to secure an $8.1 billion loan package to further bolster its finances.

These commitments from international partners have helped strengthen Ukraine’s fiscal outlook and provided policymakers with greater confidence in easing monetary policy while safeguarding financial stability.

Challenges and Risks Ahead

Despite progress, the economic environment remains uncertain. Ongoing conflict continues to inflict damage on infrastructure and dampen investor confidence. Energy shortages and higher imports have raised demand for foreign currency, potentially influencing inflation dynamics later in the year.

The National Bank reiterated its commitment to closely monitoring inflation expectations and foreign exchange market conditions to ensure that monetary policy remains responsive to evolving risks.

Impact on Households and Businesses

The interest rate cut is expected to lower borrowing costs for households and businesses, potentially encouraging investment and consumption. In particular, easier credit conditions may help small and medium-sized enterprises navigate the economic challenges posed by the war.

However, elevated inflation expectations and external price pressures suggest that the central bank must remain cautious in its approach to future policy adjustments.

Looking Forward

Overall, Ukraine’s decision to reduce the key interest rate signals a cautious but meaningful shift toward supporting economic activity after inflation showed sustained signs of cooling. The central bank continues to balance the need for financial stability with strategies aimed at fostering growth and resilience during a period of significant uncertainty.

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