Ukraine’s central bank, the National Bank of Ukraine (NBU), kept the key rate at 15% and put its cycle of interest rate easing on hold as war in the Middle East raised the risk of increasing inflation.
The war in the Middle East has already led to a significant increase in the price of petroleum products and gas, even as inflation had until recently been declining. Now it may rise again.
Headline inflation accelerated slightly in February, to 7.6% year-over-year, core inflation stood at 7.0% year-over-year. Headline inflation only slightly exceeded the NBU’s forecast trajectory from the January 2026 Inflation Report, and core inflation was fully in line with the forecast.
Inflation expectations remained elevated following January strikes on the energy grid by Russia forces – and now the prices for fuel are rising due to the war in the Middle East.
“We see that the balance of risks has shifted upward. We see that the January forecast, based on which we had planned to ease monetary policy in light of these factors and external conditions, is not materializing at this time,” NBU governor Andriy Pyshny said at the briefing. That is why the central bank decided to hold the rate, he said.
The NBU Board announced the decision at a briefing with reporters on Thursday, March 19.
The war in the Middle East exposed pressure on prices
“To be specific, fuel prices have already risen by 12.5% in March. Most likely, this figure will increase, possibly to 16%. The direct contribution to annual inflation from rising fuel prices – and if these prices become entrenched – will be about 0.45 percentage points,” Deputy Governor Volodymyr Lepushynskyi said at the briefing, in response to questions by reporters.
“There are also secondary effects, since the cost of fuel is directly factored into the cost of the final product. And these effects could be twice as large as these 0.45 percentage points. That is, potentially, if tensions continue and the Strait of Hormuz is blocked, keeping energy prices high, this could lead to higher inflation rates by the end of this year,” he added.
If oil prices remain at $80-100 per barrel, Ukraine’s overall import volumes will rise by $1.5-3 billion, according to Lepushynskyi’s preliminary estimate. That figure includes more expensive fertilizers. But no worries for Ukraine’s exports as they are transported through the Black Sea or across western borders with the EU.
Higher oil prices give Russia more cash to sustain the war, marking another risk for heavier strikes on Ukraine, Pyshny added.
The silver lining is Ukraine’s adaptability, Lepushynskyi said, replying to a Kyiv Post question. Although unlike the US economy, the lack of capital markets and capital controls gives Ukraine fewer resources to adapt.
“Our economy adapts very quickly, he said. “When it was necessary to change logistics, the logic of production processes, and their optimization under conditions of a shortage of personnel. All this is happening, and the economy of Ukraine quite quickly transitioned to growth already in 2022.”
If the war in the Middle East is prolonged, global energy prices will most likely deviate significantly from the NBU’s forecast trajectory, the press release said.