Ukraine's Monetary Policy: A Test of Credibility in Turbulent Times

The National Bank of Ukraine (NBU) stands at the crossroads of economic survival and strategic transformation. Since Russia's full-scale invasion in February 2022, the NBU has been tasked with an extraordinary mission: maintaining macroeconomic stability amid relentless security threats, supply chain disruptions, and global inflationary pressures. Its success hinges on the credibility of its inflation targeting (IT) framework—a system now tested as never before.

The Evolution of Ukraine's Monetary Policy Framework

Before the war, Ukraine's NBU operated under a conventional IT regime, using a floating exchange rate and the key policy rate as its primary tool. By 2025, the framework has evolved into a hybrid model—flexible IT—designed to navigate the unique constraints of wartime economics. This shift, necessitated by the invasion's destabilizing impact, combines high policy rates, exchange rate management, and capital controls to anchor inflation expectations.

The current policy rate of 15.5% (as of June 2025) reflects the NBU's dual focus: curbing inflation while shielding the hryvnia from collapse. Recent inflation data underscores the challenge. After peaking at 14.8% in May 2025—driven by spring frosts ravaging agricultural output and lingering demand pressures—the NBU anticipates a gradual decline to 8–9% by year-end, aided by a robust harvest, lower global oil prices, and statistical base effects.

Credibility Under Siege: How the NBU Maintains Trust

The NBU's credibility is its most valuable asset. Since 2015, reforms have entrenched its independence and transparency, culminating in a constitutional mandate to prioritize price stability. These institutional safeguards have proven critical. Despite the war's toll on infrastructure, labor markets, and fiscal resources, the NBU has maintained a floating but managed exchange rate, avoiding the pitfalls of hyperinflation that plagued Ukraine in the past.

The central bank's adaptive tactics include:
1. High policy rates: Sustaining demand for hryvnia-denominated assets while curbing inflation expectations.
2. FX market intervention: Managing liquidity through reserves bolstered by $18 billion in international financing (2022–2025), including IMF and World Bank support.
3. Communication discipline: Clear messaging on its inflation target of 5% and its path to returning to conventional IT once security risks abate.

Governor Andriy Pyshnyy has emphasized the NBU's “singleness of money” principle—ensuring the nominal value of hryvnia deposits remains intact. This focus has prevented a collapse in confidence, even as the war drags on.

Risks and Uncertainties: The Long Shadow of Conflict

The NBU's success is far from assured. Persistent security threats—such as energy infrastructure attacks and labor shortages—risk derailing inflation control. A poor harvest due to adverse weather or supply chain disruptions could reignite price spikes. Meanwhile, the economy's reliance on external financing introduces vulnerability: if international support wanes, the NBU's policy tools may prove insufficient.

Geopolitical risks also cloud the outlook. A prolonged war could permanently reduce Ukraine's economic potential, straining fiscal budgets and forcing the NBU to prioritize stabilization over inflation targeting.

Investment Implications: Navigating Uncertainty

For investors, Ukraine presents a paradox: high risks coexist with compelling opportunities.

• Currency and Bonds: The hryvnia's stability and the high policy rate (15.5%) make Ukrainian government bonds an outlier in a world of historically low yields. However, geopolitical risks demand hedging or a long-term horizon.
• Equities: Selective investments in sectors insulated from conflict—such as technology, agriculture, or energy—could benefit from post-war rebuilding, though volatility remains a constant.
• Hedged Strategies: Investors might pair exposure to Ukrainian assets with hedges against currency depreciation or inflation-linked securities.

Conclusion: Credibility as the Ultimate Defense

The NBU's credibility is its best defense against inflation and instability. By maintaining transparency, adapting its tools, and leveraging international support, it has avoided the worst outcomes. Yet the path to conventional IT—and sustained macroeconomic stability—depends on two variables: the war's trajectory and the global environment.

For investors, Ukraine is a high-stakes bet. Success hinges on the NBU's ability to sustain its framework through adversity—a testament to the power of institutions in turbulent times.

Invest wisely, but brace for turbulence.