NBU Raises Prime Rate to 14.5%, Signals Further Hikes Ahead

UKRAINE - In Brief 23 Jan 2025 by Dmytro Boyarchuk

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The NBU Board has raised the prime rate again by 1.0 ppt to 14.5%, effective January 24. The 'working' rates have also been adjusted: the overnight deposit certificate rate increased to 14.5% (from 13.5%), the three-month deposit certificate rate rose to 17.0% (from 16.0%), and the refinancing rate climbed to 17.5% (from 16.5%). Furthermore, the NBU projects further increases in the prime rate to curb excessive inflation. Accelerating consumer inflation (+1.4% m/m and +12.0% y/y in December 2024) is an important factor behind the recent tightening. However, it seems the primary driver of both the rate increase and the hawkish tone of the NBU's communication was the $5.3 billion in FX market interventions in December—a level unprecedented even during the last three years of the full-scale invasion and double the average monthly figure for 2024 up to November. The NBU appears to recognize rising depreciation expectations and is taking proactive measures to curb this trend through tighter monetary policy. If my interpretation of the NBU’s rationale is correct, another prime rate increase seems almost inevitable, especially as the widely discussed exchange rate of 45 hryvnia per 1 USD for 2025 looms in the media. In this context, monetary authorities are compelled to absorb excess liquidity to reduce pressure on the FX market. While the direction of the next move seems clear, the magnitude of the adjustment will likely depend on incoming data.