Under the Law of Ukraine On the National Bank of Ukraine, the NBU prioritizes its monetary policy goal of achieving and maintaining price stability. Price stability means maintaining low and stable rates of inflation as measured by the CPI in the medium term.

The NBU has set for itself an inflation target of 5%. The central bank pursues a monetary policy that steers inflation towards this target within an appropriate policy horizon of three years at most.

The NBU within its purview also promotes financial stability, including the stability of the banking system, maintains sustainable rates of economic growth, and supports the government’s economic policy, unless doing so impedes the regulator’s capacity to attain its priority goal of ensuring price stability.

The NBU had been conducting its monetary policy through a full-fledged inflation targeting (IT) regime with a floating exchange rate from 2015 to the outset of the full-scale war on 24 February 2022.

This regime’s key features are outlined in the NBU’s Monetary Policy Strategy. Specifically, it stipulates a number of mandatory elements:

• priority of achieving and maintaining price stability
• public communication of a quantitative inflation target
• forward-looking nature of monetary policy decisions aimed at fulfilling the NBU’s commitment to attain its inflation target within an acceptable policy horizon (9–18 months), in particular to manage inflation expectations
• use of the key policy rate as the main instrument of monetary policy
• pursuit of a floating exchange rate regime
• institutional, financial, and operational independence of the NBU for the proper performance of its functions
• transparency and accountability of NBU activities through a sustainable system of communications with society (including clear and transparent communication of reasons behind monetary decisions).

The full-fledged IT regime has proved to be effective both in Ukraine and in countries with similar economic conditions, which was reflected, in particular, in lower inflation and stabilized economic growth.

Elevated economic uncertainty and decreased effectiveness of market instruments caused by the outbreak of the full-scale war made it temporarily impossible to conduct monetary policy in full-fledged-IT format. The NBU had to change its approaches to fulfilling its priority functions, as well as the objectives and principles of the central bank’s monetary policy, and these changes were set forth in the Monetary Policy Guidelines for the Duration of Martial Law.

Specifically, when russia launched the full-scale invasion, the NBU had to temporarily switch to an exchange rate peg, impose harsh administrative restrictions on the FX market and cross-border capital flows, and even resort to the monetary financing of public debt to support Ukraine’s defense capabilities.

The key policy rate lost its effectiveness in the face of extreme uncertainty, so the NBU did not change it during the first months of the war. The role of the main monetary instrument was assigned to FX interventions, through which the NBU fixed the exchange rate, meeting FX shortages in the market, and thus stabilizing economic expectations.

The measures taken by the NBU helped calm expectations and buy time for economic agents to adapt to the war. In this way, the NBU was able to maintain the confidence of Ukrainians in monetary policy and the hryvnia, which ultimately helped safeguard macrofinancial stability in general.

As economic agents adjusted to wartime conditions, the overall uncertainty cleared up significantly, and the economy returned increasingly closer to market-based operating principles. During 2022–2023, we managed to significantly slow inflation and largely restore the effectiveness of the key policy rate. In addition, the NBU eased the most burdensome FX restrictions and subsequently moved from the peg to managed flexibility of the exchange rate in order to strengthen its capability to absorb shocks.

This allowed the NBU to transition to a flexible IT regime in 2024, an interim step on the way back to full-fledged IT with a floating exchange rate.

The gradual restoration of the key policy rate’s effectiveness, the strengthening of the role of inflation as a nominal anchor, and the successful introduction of managed flexibility of the exchange rate allowed the NBU to transition to a flexible IT regime.

The key features of the current monetary regime are enshrined in the Monetary Policy Guidelines for the medium term. A number of features of this regime are similar to those of full-fledged IT, which was in place before the full-scale invasion. Those include:

• delivering and maintaining price stability as a priority
• consistency, predictability, and forward-looking nature of monetary policy decisions
• securing the NBU’s institutional, financial, and operational independence for the proper exercise of its functions and prevention of fiscal dominance
• ensuring transparency and accountability of the NBU’s activity to the public (in particular, with the use of an effective communication system).

However, flexible IT has a few characteristics that distinguish it from the full-fledged IT setup that was in effect prior to the full-scale war.

In particular, to be able to respond more flexibly to macroeconomic turbulence, the NBU shifted away from its conventional target range of 5% ± an acceptable deviation of 1 pp and towards a point target of 5%. In addition, the maximum length of the policy horizon, i.e. the period within which the NBU must return inflation to its target, has now been extended from 9-18 months to 3 years.

This enables the NBU to act more flexibly and accept short-lived deviations of inflation from the target in order to ensure a balance between keeping inflation processes under control and supporting the economy’s recovery from the war’s consequences, provided that doing so does not threaten to permanently unanchor inflation expectations. 

Given the still limited capacity of the key policy rate to fully function as the main monetary policy instrument, another important distinguishing feature of the current monetary regime is the more active use of exchange rate policy tools, including FX interventions, in combination with interest rate policy, exchange rate restrictions, and other instruments in the monetary toolkit.

In addition, with war-driven uncertainty running high, the NBU maintains the overall forward-looking nature of monetary policy decisions and puts a greater emphasis than before on responding to significant deviations of current developments in macroeconomic indicators from their forecast trajectories, as well as to significant changes in the balance of risks to inflation dynamics and the sustainability and controllability of FX market conditions.

The NBU intends to use flexible inflation targeting until the economy is fully normalized, which is unlikely to happen before the active phase of the war is over. At the same time, the NBU’s ultimate goal remains unchanged: to return to the regular floating exchange rate IT regime – a regime that allows the NBU to achieve its goals of price and financial stability and sustained economic growth in the long term.

The NBU uses managed flexibility of the exchange rate as a transitional regime on the way back to a floating exchange rate.

Under this regime, the NBU continues to be active on the FX market by covering the war-induced structural deficit of foreign currency in the private sector. Coupled with smoothing out excessive exchange rate volatility, this contributes to keeping inflation and exchange-rate expectations in check, maintaining confidence in the hryvnia, and gradually achieving the inflation target.

At the same time, the NBU’s activity in the FX market is also aimed at gradually enhancing the link between exchange rate developments and changes in the balance of supply and demand in the FX market. This will help to gradually strengthen the exchange rate’s role as an adjustment mechanism for Ukraine’s economy in order to increase its ability to adapt to changes in internal and external conditions.

In making its FX interventions, the NBU operates on the following core principles:

• gradual strengthening of the exchange rate’s role as an adjustment mechanism
• consistency with interest rate policy and the policy of easing FX restrictions to achieve intended synergy effects
• maintaining a sustainable and controllable situation on the FX market
• ensuring the exchange rate fluctuates both ways in response to changes in the balance of supply and demand in the FX market
• constructive uncertainty about the parameters and tactics of FX interventions for FX market participants
• acknowledging risks and being ready to respond to them, including by reducing exchange rate flexibility parameters as needed.

The exchange rate regime and the principles of FX interventions are laid out in more detail in the Monetary Policy Guidelines for the medium term.

The NBU remains committed to the conventional regime of inflation targeting with a floating exchange rate and will strive for a gradual return to the monetary policy principles it applied before the full-scale war, provided that doing so creates no threats to the stable operation of Ukraine’s financial system and economy.