NBU Hikes Rate to 16.5% After Forecast Turns to Recession and Higher Inflation

Ukraine’s central bank raised its key policy rate by 0.5 percentage points to 16.5% on Oct. 29, after sharply worsening its macroeconomic forecast. Ukraine’s economy is now expected to shrink this year, while inflation is set to finish 2026 far above earlier projections. The National Bank of Ukraine (NBU) downgrade confirms the gloomier outlooks other analysts published earlier, which already reflected the impact of recent Russian strikes on Ukraine’s largest businesses and the effect of the port blockade.JOIN US ON TELEGRAMFollow our coverage of the war on the @Kyivpost_official. In the NBU’s updated forecast, the economy is expected to contract by 0.4% in 2026, against the 1.8% growth projected in the 2026 July Inflation report. Real GDP is expected to grow just 0.4% in 2027 (2.8% in the previous forecast) and 2.2% in 2028 (3.0% before). This is also the second contraction of Ukraine’s economy since the start of Russia’s full-scale invasion. The war caused a 28,8% drop in Ukraine’s GDP in 2022, while it grew by 5.5% in 2023, by 2.9% in 2024, and by 1.8% in 2025. End-of-the-year inflation forecast is revised upwards to 12.5% in 2026 from 10.0% and 7.3% in 2027 from 6.9%, before returning to the 5.0% target in 2028. International reserves were cut in all three years, to $62.8 billion in 2026 ($69.7 billion before) and $57.0 billion in 2028 ($70 billion before). The current account deficit narrows to $3.6 billion in 2026 from the $16.1 billion projected in July, but widens to $49.5 billion by 2028. Other Topics of Interest NovaPay Invest to Buy 100% Stake in BTA Bank Nova group subsidiary NovaPay Invest plans to acquire a 100% stake in BTA Bank to launch a financial inclusion bank in Ukraine Inflation was driven primarily by direct and second-round effects from the surge in fuel prices caused by the war in the Middle East, as well as the summer wave of Russia’s attacks on Ukraine’s warehouses and logistics. The NBU has also estimated the toll of Russian blockade of sea ports and attacks on production facilities and logistics, saying it subtracted 1.9 percentage points from this year’s GDP. In the third quarter this year, the NBU estimated that the real GDP decreased by 0.5% year-over-year. “The NBU estimates that consequences of aerial attacks alone will add around 0.7 percentage points to annual inflation. Other important factors affecting the price dynamics will include effects of higher fuel prices and an expansion of fiscal stimulus,” NBU governor Andriy Pyshny said during the monetary press briefing on Thursday, where the NBU board presented the decision. Metallurgical and ore mining enterprises suffered the greatest losses while performance also deteriorated in other industrial sectors, trade, and agriculture, he added. For 2027, the NBU assumes inflation will be restrained by the likely cooling of domestic demand and the labor market in the coming months after Russia’s attacks. The central bank wrote that international aid in the third quarter fell short of expectations because Ukraine delayed reforms, although parliament adopted laws in October to unblock EU and IMF financing. Its forecast assumes about $50 billion in direct budget support and more than $32 billion under the defense component of the Ukraine Support Loan in 2026, and $52 billion and $37 billion respectively in 2027. Lending growth remained strong despite tighter policy. In September, net hryvnia corporate loans grew more than 32% year on year and net retail loans more than 38%. The war remains the primary risk to inflation and growth, per the central bank press release, as Russian strikes on production and infrastructure raise costs and cut supply, in addition to higher oil prices from the war in the Middle East. The NBU’s forecast envisages keeping the key rate at 16.5% until the second quarter of 2027. The NBU expects a slow recovery in 2027-28, supported by investment in the defense industry, localization of weapon production financed by the Ukraine Support Loan, and reconstruction of critical infrastructure. Olena Hrazhdan is the Business Reporter at Kyiv Post, covering Ukraine’s markets, business, and economic policy. While she reports broadly on economic issues, her core focus is banking, finance, monetary and fiscal policy. Olena previously wrote for leading Ukrainian business media and became a Fellow of the International Monetary Fund’s Journalism Fellowship in 2024.