For over three years, the National Bank has been navigating Ukraine’s monetary policy through conditions unlike anything seen in modern banking. Here’s what it got right, where it stumbled, and what needs to change now.
NBU at the core of Ukraine’s defence
The National Bank of Ukraine (NBU), like central banks everywhere, is a cornerstone of executive power in safeguarding economic stability. Its importance becomes even sharper in a full-scale war, where the strength of the national economy—and the state’s capacity to sustain military operations—hinges on the central bank’s decisions. In this analysis, we examine how the NBU has navigated monetary policy over more than three and a half years of conflict, and what adjustments are now essential to fuel Ukraine’s economic growth in the years ahead.
By design, a central bank operates independently from other branches of government. But in practice, central banks often play a crucial role in supporting a country’s war effort, beyond simply maintaining economic stability—primarily by ensuring government solvency and keeping the banking system liquid.
The NBU’s approach, however, is unlike anything seen before. This war is the first major European conflict since World War II involving a country with established democratic institutions operating in a fully globalised economy. That country is Ukraine.
Ukraine’s National Bank carries out many functions, but one stands out above all others, enshrined in Ukraine’s Constitution. Article 99 declares: “Ensuring the stability of the monetary unit is the main function of the central bank of the state — the National Bank of Ukraine.” Yet in wartime, the Bank’s other mission—taming inflation—becomes just as crucial.
War, especially a full-scale war, demands a massive surge in government spending. In 2021, the Armed Forces of Ukraine were funded at 122 billion hryvnias (approximately 2.98 million USD). By 2023, that number had skyrocketed to 2,098 billion hryvnias — an increase of nearly 2 trillion (48.8 billion USD), more than 17 times higher.
Such a rapid expansion in government demand puts enormous inflationary pressure on the economy, especially when layered atop other war-related factors. Debt financing was inevitable: between March and December 2022, 562.9 billion hryvnias—46.4% of total funding—came from external sources, becoming the primary means of financing the state budget that year. Domestic government bond auctions raised 250.4 billion hryvnias, or 20.6% of the total, while the NBU stepped in with roughly 400 billion hryvnias—33% of the funding—through the purchase of war bonds.
In fact, the NBU’s purchase of government bonds is exactly the kind of emission financing more commonly known as “the printing press.” This floods the economy with money, a classic driver of inflation. At the same time, the Bank sought to temper price growth through other measures, which we will explore below.
Of course, “printing money” at this scale is inherently risky. But with territory lost and the military’s needs mounting, there was little alternative. Waiting for aid from allies, who as usual were in no rush, was not an option. From early 2023, the practice was scaled back, in part to avoid jeopardising funding from the International Monetary Fund (IMF).
Prices and interest rates
Inflation in Ukraine was already running hot before Russia’s full-scale invasion. By January 2022, the NBU had recorded a 10% year-on-year rise in prices. But after late February, the situation became alarming: prices surged, and by October 2022, inflation had hit a peak of 26.6%. It stayed stubbornly above 20% through the first quarter of 2023.
To rein in inflation, the NBU leaned on its traditional tool: raising the key policy rate, the interest rate at which it lends to commercial banks. The Bank’s website lays out in detail how shifts in this rate ripple through the economy. In plain terms, higher rates make loans more expensive, slowing business activity—and the reverse is true when rates fall. Economists still debate how effective this transmission mechanism is in Ukraine’s unique context, a point we’ll revisit in the article’s conclusion.
Ukraine faced the full-scale Russian invasion of 2022 with a key policy rate of 10%, but by early June, the NBU had hiked it to a staggering 25%. By comparison, the US Federal Reserve currently sets its benchmark rate between 4.25% and 4.50%, and a decade ago it was just 0.25%. The NBU kept the key rate at 25% for over a year, until July 2023, when it began a gradual reduction to 13%. However, at the start of 2025, the rate climbed again to 15.5% in response to another surge in inflation.
Exchange rate policy
The NBU’s exchange rate policy during the war unfolded in two phases: before July 2022 and after. Initially, the central bank pegged the hryvnia at 29.25 per US dollar and imposed a series of restrictions, including a moratorium on international currency payments. These steps aimed to curb wild swings in the exchange rate — at the time, dollars were trading on the black market for 40–50 hryvnias.
But such measures couldn’t last. Internal imbalances caused by monetary financing of the state budget deficit gave rise to a parallel, black-market currency exchange, driving the dollarisation of the economy. Even as some currency restrictions were gradually lifted, by July 2022 the gap between official and unofficial rates had widened to 28%. Efforts to scale back “printing press” financing in the second half of the year, coupled with incremental boosts in international aid, were not enough to stop Ukraine’s foreign currency reserves from dwindling — a critical buffer for balancing supply and demand in the currency market. By summer 2022, NBU reserves had dropped to their lowest level since 2019.
In July 2022, the NBU sharply devalued the hryvnia by 25%, bringing it to 36.57 per US dollar. Alongside other tightening measures, this move helped align the official exchange rate with the fundamental realities of Ukraine’s economy. Gradually, the NBU lifted restrictions on capital flows, and by October 2023 it shifted to a so-called “managed float” exchange rate regime. Since then, the hryvnia has continued to weaken, but at a much slower pace. For over three years now, the NBU has refrained from intervening to fix the currency’s value.
Why the NBU needs to ease up
We’ve looked at how the NBU has wielded its main monetary policy tools throughout the full-scale war. The central bank has maintained a tight stance, constantly wary of runaway inflation. Even when inflation dipped to its lowest point since early 2022 — just 3.2% in April 2024 — the NBU held the key policy rate at no less than 13%. As we’ve seen, that didn’t stop inflation from climbing back above 15% just a year later.
Meanwhile, the government has kept fiscal policy surprisingly soft for wartime conditions. Public spending has surged, bolstered in part by foreign aid, while taxes remained unchanged until early 2025.
But the rigidity of monetary policy has taken a toll on growth. Bank lending contracted to a historic low of 14.6% of GDP in 2025, making credit expensive and driving up the cost of investment. Investment in Ukraine is under severe strain: private investment in 2024 was down 35% compared with 2021, while private consumption dropped 19% over the same period. Taken together, these trends point toward stagnating production and a broader loss of potential economic growth down the line.
Another downside of high interest rates is the rising cost of government debt. Interest payments on domestic debt climbed from 1.9% of GDP in 2021 to 3.1% in 2023, reaching 3.2% of GDP in January–July 2025. The weighted average yield on government bonds hit 12.7% in 2022 and 18.7% in 2023, rising further in 2025 from 14.9% in January to 16.2% in July.
This raises a critical question: is the NBU really achieving its goal of taming inflation through high rates? Doubts are justified. Term deposits in hryvnias remain low, at less than 5% of GDP, while the average deposit rate barely tops 10% — even as banks earn 19% on three-month NBU certificates. In practice, it seems commercial banks are the main beneficiaries of the tight monetary policy, enjoying the exceptionally high NBU rates.
Given this, NBU leadership should now consider easing monetary policy. Lowering rates could stimulate private investment and consumption, while boosting overall business activity by cutting borrowing costs. Such a move is unlikely to reignite inflation but could create the conditions needed for sustainable economic growth in the years ahead.
