The priority of monetary policy is to achieve and maintain price stability. With low and stable inflation, the incomes and savings of Ukrainians are protected from losing value, and entrepreneurs have the opportunity to plan long-term investments in the domestic economy, which contributes to job creation. To attain price stability, the NBU in 2015-2021 used conventional inflation targeting (IT) with a floating exchange rate and the key policy rate as the main monetary instrument. During the full-scale war, however, the NBU first switched to an exchange-rate peg and then to flexible IT, whereby the central bank ensures that inflation is brought to its 5% target within a policy horizon of three years at most, by applying a consistent combination of interest-rate and exchange-rate policy instruments, FX restrictions, and other tools as necessary. After security risks abate and appropriate macroeconomic prerequisites are put in place, the NBU will return to conventional IT.
The primary goal of the NBU’s monetary policy is to maintain price stability, meaning low and stable inflation.
Price stability is a situation in which prices grow so insignificantly that people do not incorporate inflation in their borrowing, investment, and savings decisions.
The NBU also promotes financial stability and sustainable economic growth unless it compromises the price stability objective.
In order for inflation targeting to work, the following conditions must be met:
Inflation targeting has proven effective in countries with operating conditions similar to Ukraine’s. In particular, it helps reduce inflation and stabilize economic growth. The NBU applies an inflation targeting approach in order to best facilitate Ukraine's sustainable economic growth.
To meet its inflation targets, the NBU adjusts its key policy rate. By changing the key policy rate, the NBU influences short-term interest rates in the interbank market.
This affects the interest rates on loans and deposits that banks offer to businesses and households. At the same time, this impacts consumption and investment by individuals and businesses, thus affecting inflation. This relationship between the key policy rate and inflation is called the transmission mechanism.
Monetary policy measures take time to have an effect on the economy and inflation. This is why monetary policy is always aimed at the future.
The NBU’s decisions on the key policy rate are based on the inflation forecast rather than the current trend.
The NBU openly communicates its inflation forecast to the public in the Inflation Report.
The floating exchange rate of the hryvnia allows the Ukrainian economy to adapt to changes in the external and internal environment and to absorb negative shocks.
For precisely this reason, the NBU has introduced the floating exchange rate regime. Under a floating exchange rate regime, the demand for and supply of foreign currency determines the exchange rate.
The NBU does not aim to maintain the foreign exchange rate at a certain level.
The regulator does not counteract the market factors that determine the foreign exchange rate but rather conducts FX interventions in the FX market to smooth out excessive volatility, accumulate international reserves, and meet other strategic objectives.
