Inflation in Ukraine will reach 31% by the end of the year – the forecast of the National Bank

What happened? Inflation in Ukraine will accelerate: it is expected to reach 31% by the end of the year. It will start to decrease in the 1st quarter of 2023.

Source. The inflation report of the NBU.

Details. It is noted that the increase in price pressure in Ukraine was influenced by disruptions in supply chains, a reduction in the supply of certain goods, an increase in business costs, the physical destruction of production facilities and infrastructure, the persistence of high energy prices and record levels of inflation in partner countries.

The National Bank notes that the inflation expectations of businesses and households increased markedly. This was reflected in deteriorated maturity structure of bank deposits and higher spending on some durable goods, primarily imported goods. As a result, inflation has been growing rapidly over the last months, reaching 21.5% in June.

The regulator draws attention to the fact that in the coming months the probability remains high that russia will continue its terrorist attacks on infrastructure and production facilities in Ukrainian cities, which will disrupt logistics, increase businesses’ risks, and destabilise expectations.

In addition, global energy prices will also remain high, especially natural gas prices. The NBU foresees a possible reduction of security risks in the forecast for the beginning of 2023. The baseline scenario envisages that Ukraine’s Black Sea ports will fully recommence operations from the beginning of 2023. It also includes the continued active financial support to Ukraine from the international community, in particular the successful implementation of the new IMF programme in 2023–2024 is assumed.

“The policies of the NBU and the government will gradually normalise. The NBU will return to the traditional principles of inflation targeting with the floating exchange rate. The monetary financing of budget needs will be phased out,” the National Bank assures.

“The reduction of inflation in Ukraine will also be facilitated by the gradual subsidence of world inflation and further tight monetary conditions due to the policies of the National Bank of Ukraine,” the regulator adds.

The National Bank predicts that, taking into account the consequences of the war and the large contribution of the increase in administered prices, inflation will drop to 20.7% in 2023, and 9.4% in 2024. Inflation is expected to return to the 5% target in 2025.

Previously. The real salaries of Ukrainians will decrease by 27% this year due to inflation. Salaries will still be below pre-war levels even at the end of 2024.