By Olena Harmash

KYIV (Reuters) – Ukraine's central bank held its main interest rate at 13% on Thursday, aligning with market expectations while remaining cautiously aware of rising inflation in the wartime economy.

The central bank increased its inflation forecast to 9.7% by the end of 2024, up from a previous 8.5%. Consumer inflation accelerated to 8.6% year-on-year in September, driven by rising food, energy prices, and business costs. The bank anticipated continued consumer price rises in October.

Governor Andriy Pyshnyi noted that previous decisions and prudent policies helped maintain inflation control while supporting the economy. He mentioned, “We do not see reasons to change the rate for now,” implying stability at this rate until the end of H1 next year. He added that inflation has not peaked yet.

WAR REMAINS KEY RISK

Pyshnyi emphasized that the ongoing war against Russia poses significant risks to economic and inflation dynamics. The war's continuation threatens to further reduce economic potential through losses in population, territory, and production facilities. The pace of economic normalization hinges on the war's nature and duration.

As the conflict nears the 1,000-day mark, Russian troops control around 18% of Ukrainian territory, with ongoing advances and consistent missile attacks on cities and infrastructure.

Ukraine's economy was severely impacted by the invasion, resulting in a third reduction in GDP in 2022. However, the economy has begun to recover, with a 5.3% GDP rise in 2023, although recovery remains limited. The central bank slightly revised GDP growth to 4% from 3.7% earlier this year.

Kyiv-based Dragon Capital pointed out that while national electricity deficits and labor shortages have negatively affected recovery, improving exports through Odesa's Black Sea ports mitigated some of this impact. The forecasts for GDP growth remain at 4% for this year but express skepticism about next year.

The firm predicts 3% GDP growth in 2025, driven by recovering domestic consumption and weapon production, despite ongoing electricity and labor shortages. The central bank estimates GDP growth in the range of 4.3%-4.6% for 2025 and 2026, supported by substantial budget spending, international financing, rising household income, and anticipated better harvests.

Pyshnyi stated the government expects over $15 billion in international aid by the year's end, aiming for a total of $41.5 billion in 2024 and $38.4 billion in the subsequent year.