Inflation in Ukraine – what to expect?

director of the department of treasury and investment services of JSC “Ukreximbank”

IN And for half a year, Ukraine maintained a stable positive trend of reducing inflationary pressure in the economy. In June, the rate of consumer inflation amounted to 12.8% in annual terms, compared with 26.6% at the beginning of the year. During July, inflation continued to decrease, amounting to 11.3% y/y.

The actual dynamics of the slowdown in consumer inflation significantly exceeded the expectations of the National Bank and market participants. At the beginning of the year, the regulator’s official forecast predicted a decrease in price pressure in the first half of the year to 18.7% y/y, and already in April such expectations were improved to 14.5% y/y.

Together with the achieved stability of the foreign exchange market, this created the prerequisites for a faster start of the cycle of softening of the interest policy by the NBU. Already at the end of July, the regulator approved the reduction of the discount rate from 25% to 22% for the first time in more than a year.

Slowing inflation improves prices offers on food products and contributes to the absence of fuel shortages.

Such conditions were achieved due to the relative stabilization of the security situation, in particular through the liberation of a part of the territories in the south and east of Ukraine, the saturation of the domestic market in conditions of limited export opportunities, and significant adaptation of the economy to new operating conditions, in particular through the establishment of logistics and production chains.

Another positive factor was the cooling of global energy prices during the first half of the year. The price of Brent oil remained at the level of about 80 dollars. USD per barrel after more than USD 100. US per barrel in the summer of 2022.

Prices were under pressure from a global economic slowdown and demand amid tight monetary policy from leading central banks and China’s slower recovery, as well as unwarranted supply shocks from the implementation of price restrictions on Russian oil supplies.

Moreover, the contribution of the NBU’s balanced policy and coordination of efforts with the Government was significant.

Implemented measures to increase the attractiveness of hryvnia assets and the stability of the cash market made it possible to stabilize the exchange rate and inflation expectations of the main market participants, which supported the slowdown in inflation for a wide range of food and non-food products, primarily with a significant import component.

The activity of the Ministry of Finance and the National Bank to activate the internal market of public borrowing and to refuse direct financing of the budget deficit, the volume of which in 2022 amounted to UAH 400 billion, also had a positive effect on inflation.

The slowdown in inflation will continue in the coming months. In addition to the above-mentioned factors, the effect of the implemented fixation for the period of martial law of individual tariffs for communal services for the population will remain.

Forecasts for the second half of 2023

Already at the end of July, the National Bank once again improved its basic expectations regarding the dynamics of consumer prices in Ukraine: based on the results of the current year, the projected inflation rate was reduced from 14.8% y/y to 10.6% y/y, and by the end of 2024 it is assumed slowing down to 8.5% y/y.

However, during the second half of the year, the rate of inflation will appear slower, due to the fact that the first half of 2023 will be the basis for comparison, rather than the high figures of 2022.

Consumer inflation will be negatively affected by the direct and indirect effects of fuel price increases due to the resumption of taxation and the increase in world prices, as well as the revision of electricity tariffs.

Among the main pro-inflationary risks, a longer period of full-scale invasion and unbalancing of public finances as a result of a drop in the volume of international financial aid and a return to emission financing of the budget remain relevant.