Rationale for the Decision
This decision comes as part of the NBU's ongoing strategy to ease interest rates to support economic recovery. The move is influenced by subdued inflation indicators, improved inflation expectations, and a balanced risk outlook for future inflation dynamics.
"In light of the persistent moderation in inflation and the positive trend in inflation expectations, the National Bank is continuing its cycle of easing interest rates," the NBU stated.
Current Inflation Trends
Inflation in Ukraine remained steady in April and saw a slight increase in May, reaching 3.3% on an annual basis. These growth rates in consumer prices were below the NBU’s expectations as outlined in the April 2024 Inflation Report. The deviation from forecasted inflation is largely attributed to a rapid decline in raw food prices due to favorable weather, high harvests from the previous year, and some producers shifting focus to the domestic market.
Core Inflation Insights
Core inflation, a measure that excludes volatile items like food and energy prices, was reported at 4.4%, aligning with the NBU's forecast and remaining within the target range for over six months. Factors influencing this include:
- Secondary Effects: The reduction in raw food prices has had a knock-on effect on a broad range of goods and services, stabilizing prices despite fluctuations in the exchange rate.
- Business Costs: Rising business expenses, particularly in labor and electricity, have led to price increases across various components of the basic consumer price index.
Conclusion
The NBU’s decision to lower the discount rate aims to bolster economic recovery by making borrowing more affordable and stimulating economic activity. This policy adjustment reflects the central bank’s confidence in the current inflation trajectory and the broader economic outlook.
For investors and businesses, this rate cut signifies a more favorable environment for borrowing and investment, potentially driving growth in various sectors of the economy. As the NBU continues to monitor economic indicators, further adjustments to the monetary policy may be considered to ensure sustained economic stability and growth.
