NextFin News - Ukraine’s central bank left its key policy rate at 15% and warned that inflation will keep rising into the second half of the year, a sign that the policy problem has shifted from cooling demand to preventing wartime supply shocks from becoming a broader price regime. The National Bank of Ukraine said inflation is now expected to reach 9.4% at the end of 2026 before easing only gradually, with growth still forecast at 1.8% this year.
What The Bank Is Trying To Stop
The NBU said price pressure had been building after a run of forces that monetary policy cannot directly fix: damaged energy infrastructure, higher fuel prices, a weaker hryvnia in earlier periods, and faster-than-expected wage growth. In its latest statement, the central bank said inflation had been declining steadily from June 2025 to January 2026, but then started to rise again. It also said higher fuel prices would feed into inflation both directly and through second-round effects, the clearest sign that policymakers are worried about a self-reinforcing loop rather than a one-off spike.
The bank’s updated forecast puts inflation at 7.5% at the end of 2026, 6% in 2027, and 5% in 2028. It also lowered its assumption for the electricity deficit to 6% from 3% this year, underscoring how much of the inflation story now sits on the supply side. That matters because the rate channel can restrain credit growth, support confidence in hryvnia assets, and shape expectations, but it cannot rebuild the power grid or offset every imported cost shock. The policy rate can slow the pass-through. It cannot remove the shock itself.
That is why the NBU’s decision is better read as a credibility defense than as an attempt to trigger a quick disinflation cycle. The central bank is trying to show that 15% is still restrictive enough to keep inflation anchored while the economy absorbs a succession of wartime cost shocks.
Why This Is More Than A Simple Hold
A 15% policy rate would be a blunt anti-inflation tool even in a normal economy. In Ukraine, the question is not whether policy is tight in nominal terms. It is whether it is tight enough to offset the second round of the shock. The first round is already visible in energy and fuel prices. The second round is the more dangerous one: businesses pass on higher costs, households defend real income through wage demands, and expectations drift upward. Once that loop starts, it tends to be slower to reverse than the original shock.
The NBU’s own language points to that risk. By saying higher fuel prices will pass through both directly and through second-round effects, the bank is effectively admitting that the issue is no longer just the spot price of energy. It is the inflation process that follows it. That is why the policy decision matters even if the rate itself did not change. The central bank is trying to prevent a temporary deterioration in supply from turning into a longer-lasting inflation adjustment in wages and prices.
This also explains why the bank kept emphasizing the need to maintain the attractiveness of hryvnia instruments and sustain foreign-exchange market stability. If the currency weakens further, the imported-price channel deepens the inflation problem. If it stabilizes, the pass-through is weaker. In that sense, the rate decision is a shield for the currency as much as it is a tool for CPI.
The broader macro backdrop is weak enough that the bank cannot ignore growth. The NBU still sees real GDP growth at just 1.8% in 2026, which means inflation control is being pursued in an economy that is not overheating. That is a difficult combination: the central bank needs to keep nominal discipline without crushing an already fragile recovery.
Cyclical Shock Or Structural Shift?
The short-term answer is cyclical. Wartime energy damage, fuel spikes, exchange-rate weakness, and wage catch-up dynamics can all fade if supply conditions improve and the near-term shock unwinds. The central bank’s forecast itself assumes that inflation will decelerate again after this year, which is the language of a cycle. The expected path from 9.4% in 2026 to 6% in 2027 and 5% in 2028 implies that policymakers do not think the current price burst is permanently detached from normal disinflation forces.
But the medium-term answer is not fully cyclical. Repeated attacks on energy infrastructure, the cost of building resilience into business operations, and the persistence of wartime logistics constraints all raise the cost base of the economy. That does not mean inflation must stay elevated forever. It does mean the old prewar price-setting environment is no longer the right comparison. Businesses that must spend on backup power, rerouted logistics, and labor retention face a different unit-cost structure than they did before the war. That makes the inflation process less like a single shock and more like a repeatedly renewed one.
The structural element is therefore not that the 2026 inflation print cannot fall. It is that the floor under inflation may be higher than in a normal peace-time cycle. If that is true, then the bank’s job is not to wait for prices to mean-revert mechanically. It is to preserve enough policy credibility that each new supply shock does not permanently reprice expectations upward.
“Higher fuel prices will pass through to inflation both directly and through second-round effects,” the National Bank of Ukraine said in its statement.
That sentence captures the mechanism. The first-order effect is in fuel and energy. The second-order effect is in wages, pricing behavior, and exchange-rate expectations. The market often focuses on the first and underestimates the second.
What The Market Already Knows — And What It Still May Be Missing
The market did not need to guess the bank’s inflation concern. The NBU itself now projects 7.5% inflation at the end of 2026, with growth only 1.8% this year. That combination says the bank expects disinflation, but only gradually, and only if supply-side pressure eases. Put differently, the central bank is not signaling an early easing cycle. It is signaling a long hold on restrictive policy while it waits for the shock to pass through.
The part that is easier to miss is the second-order link between policy and the exchange rate. A higher policy rate supports hryvnia instruments, which helps stabilize the currency, which in turn limits imported inflation. That chain is why a rate decision can matter even when the source of inflation is not domestic demand. The central bank is buying time for the supply side to improve without letting the currency add another layer of pressure.
That is also why the decision is not simply a macro footnote. It is a signal to households, companies, and investors that the central bank is still willing to keep nominal conditions restrictive even as growth remains weak. Credibility is doing a lot of the work here.
What Could Prove The Bank Wrong
The strongest counter-thesis is that the NBU is still underestimating how persistent the wartime inflation shock can be. If energy infrastructure remains impaired, fuel costs stay elevated, and wages continue rising faster than productivity, then 15% may not be enough to prevent inflation expectations from becoming less anchored. In that scenario, the central bank would be describing the mechanism correctly but would still be behind the curve on policy.
The falsifying signal is concrete: if monthly inflation readings keep pushing the year-end path materially above 9.4%, or if core price pressures fail to soften even as demand remains weak, then the case for a longer or tighter policy stance becomes stronger. That would mean the current hold was not a pause in a disinflation process but a delay in confronting a more durable inflation problem.
Base case: inflation eases along the NBU’s projected path as supply conditions stabilize and the currency avoids a disorderly move. Upside case: faster repair of energy capacity and less pressure from fuel prices pull inflation down sooner, allowing the bank to ease later. Downside case: repeated energy shocks, a weaker hryvnia, or sticky wage growth keep inflation above target and force policymakers to stay restrictive longer than they now expect.
The central bank is betting that wartime inflation is still manageable as a cycle, not yet a new regime. That bet will be judged by whether 9.4% becomes a ceiling or a waypoint.
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