The Monetary Policy Committee (MPC) of the National Bank of Ukraine (NBU) has postponed a decision on changing the key interest rate in the country, the regulator said in a comment on the current state and prospects of the Ukrainian economy on April 14. It will remain at 10%.
"Under the current conditions, the impact of the key policy rate on the functioning of the money market and the forex (FX) market remains limited. With this in mind, the key policy rate will stay flat at 10% until monetary transmission channels are effective again," the NBU said.
It is noted that consequences of Russia's massive attack will raise inflationary pressures, which will be partially offset by measures taken by the government and the NBU.
In March 2022, consumer inflation accelerated in annual terms, to 13.7%, up from 10.7% in February.
"The rise in consumer prices was primarily driven by disruptions of supply chains and production processes, uneven demand, higher business costs, and the physical destruction of company assets due to Russia's full-scale assault on Ukraine. Prices for food, pharmaceuticals, and fuel surged the most," reads the report.
The NBU estimates inflationary pressures to persist due to the consequences of the full-scale war.
At year-end 2022, inflation might exceed 20%, but it will remain under control, it said.
According to the NBU, businesses are gradually reopening, overcoming wartime challenges. Results of unscheduled surveys held by the NBU show a decrease in the number of companies that have stopped operations completely. While in the first weeks of March the share of these companies was above 30%, it dropped to 23% in early April.
Both supply and demand of electricity remains stable, while the number of open restaurants and their turnovers are increasing. A revival in economic activity is also evidenced by resumed sales of train tickets by Ukrainian Railways, and steady demand.
"At the same time, active combat continues in many regions of Ukraine,” the NBU points out.
"Civilian casualties are rising, and infrastructure and production facilities continue to be destroyed. Russia's large-scale assault on Ukraine has also broken production ties between regions and caused a major increase in forced migration. As a result, losses from the war will be significant.”
According to the NBU's baseline estimates, the Ukrainian economy will gradually recover. Despite that, real GDP could drop by at least one third in 2022.
All GDP components are expected to decline. More specifically, private consumption will contract on the back of the forced relocation of many Ukrainians to other countries, higher unemployment, lower incomes, and decreased spending on non-essential goods. Investment activity will also decline markedly in the wake of considerable uncertainty and high risks.
"Decreased consumption and investment could decrease imports compared to the pre-war period,” the report states.
"Exports of goods will also drop significantly due to the shutdown of companies, a reduction in sown areas, and farmers' inability to conduct agricultural work effectively because of fighting, blocked seaports, and disrupted supplies of fuel and fertilizers. At the same time, the NBU expects an increase in stocks of goods, which companies will try to export later."
The NBU emphasizes that exports plunged in March 2022 after logistical pathways were severed and production facilities were destroyed. Imports also slumped last month, dragged down by weaker domestic demand, disrupted logistics, and by imports being limited to critical goods.
"A fixed exchange rate and persisting administrative restrictions on FX transactions will remain important prerequisites for supporting macroeconomic stability in Ukraine,” says the central bank.
“However, in the long-run these measures result in macroeconomic imbalances. Therefore, the NBU will strive to resume inflation targeting with a floating exchange rate as soon as the FX market recovers its capacity to self-balance.”
The World Bank predicts that Ukraine's economic output will likely contract by a staggering 45.1% this year as Russia's invasion has shuttered businesses, slashed exports, and rendered economic activity impossible in large swaths of the country.
According to Ukraine's Finance Ministry, state budget expenditures exceeded revenues by about $2.7 billion in March. Ukraine expects the gap to widen to $5-7 billion a month in April-May due to the war.