I. Why this post exists now
I wrote this because I got tired. Tired of hearing the same unexamined premise in academic seminars and business conversations alike — that the National Bank of Ukraine is the institution doing the job: setting the rate, taming inflation, drawing the government yield curve by decree. It gets repeated as settled fact, and almost no one stops to test it against the data. The push to actually run that test came from Aswath Damodaran’s 2024 post, “Fed up with Fed Talk? Fact-checking Central Banking Fairy Tales!”, which makes the case for the United States: the Fed is far more a follower of markets than a setter of them — a rooster whose crowing the yard mistakes for the cause of sunrise.
Damodaran ran it on the US. Ukraine is not the US — and here the dependency is less obvious, because our financial system is thinner and bank-centric rather than market-centric, and because since 2015 the NBU has operated under a far more rigorous, externally disciplined inflation-targeting regime. Those two features make the regulator look more powerful than its American counterpart, which is exactly why the myth is stickier here. But the fundamentals are always the same: a policy rate is a reaction to inflation and growth before it is a cause of anything, and the further you move from the overnight corridor, the less the central bank is setting and the more the market is.
II. The three myths in one sentence
Ukrainian public discussion typically rolls three claims into one sentence: that by raising the key policy rate the NBU has administratively (1) set the rate of inflation, (2) set the yield on government bonds, and (3) set the cost of corporate bank credit. For journalism this is convenient. For practice it is dangerous — because it glues three different transmission mechanisms into a single administrative act. The paper tests each of them separately on Ukrainian data, and each of them fails.
III. Reading the policy rate as a reaction, not a decision
If the central bank reacts to macro conditions rather than setting them, then the rate itself ought to be explainable from the simplest pair of those conditions: lagged inflation and lagged real growth. Damodaran’s intrinsically-implied risk-free rate is the arithmetic sum of those two; for our purposes a linear regression is more honest than the sum.
The empirical core of the paper is a two-variable regression of the quarterly average policy rate on lagged year-over-year CPI and lagged real GDP growth, calibrated separately on four institutional windows:
- 2002–2025, the long history: R² = 0.54. Useful as background but it mixes institutionally incompatible regimes — pre-Maidan and post-Maidan, peace and war.
- 2015–2025, the post-Maidan period: R² = 0.58. The NBU is operating under tighter external discipline from this point.
- 2015–2021, the cleanest peacetime approximation: R² = 0.62. Pre-war post-Maidan window.
- 2022–2025, wartime: R² = 0.73. The narrower we draw the window, the more disciplined the rate-setting looks.
Picture 1. Actual NBU policy rate versus the implied value of the lagged CPI + GDP model. The fit tightens as the window narrows from the long history to wartime
The climb in R² is the central reading. It is not consistent with an arbitrary administrative rate; it is consistent with a regulator that reacts more tightly the more dominant inflation becomes in the macro environment. Wartime also doubles the loading on lagged CPI: the coefficient moves from 0.33 in the peacetime window to 0.57 in wartime — each printed percentage point of inflation translates into roughly 0.57 p.p. of policy rate next quarter. That doubling is itself an argument against the administrative reading. If the rate were set arbitrarily, its sensitivity to inflation wouldn’t have to double in exactly the regime where inflation became the dominant macro stressor.
A richer meeting-level reaction function (94 NBU rate decisions, February 2015 to March 2026) adding 12-month household inflation expectations, one-month hryvnia depreciation, and a war-regime dummy lifts R² to 0.74. The two heaviest coefficients are household expectations (β = 0.65, p < 0.001) and the war dummy (≈4.8 p.p., p < 0.001). Same reading: the policy rate looks like a reaction function, not a decision variable.
The honest limit. A pseudo out-of-sample test inside each window confirms that the model does not beat the naive “rate stays unchanged” rule on the level of next quarter’s rate. Naive persistence is a hard benchmark on quarterly data — most variants of the Taylor rule on developed economies lose to it too. But on the direction of the next move — up, down, or hold — the model classifies correctly about twice as often as naive persistence in every window, including the wartime one. That is real structural information about where the rate is going; it just is not an instrument for forecasting the level.
IV. Where the signal actually passes — and where it doesn’t
If the rate itself reads as reactive, the natural follow-up is how far its signal then propagates into market prices. The answer in Ukrainian data is “not nearly as far as the public discussion assumes.” The signal is tightest at the very short end of the money market and loosens steadily as we move outward.
Picture 2. The hierarchy of direct rate-setting: how far the policy-rate signal reaches across UONIA, government-bond tenors, bank rates and consumer inflation.
a. UONIA — the overnight interbank rate. Operationally tied to the policy-rate corridor. Descriptive R² ≈ 0.96 between UONIA and the policy rate over 2020–2026; after the October 2023 corridor redesign it is closer to one. UONIA is the closest thing in the system to “the NBU sets this.” It is also the only thing the NBU literally sets, and it is not a price anyone outside the interbank market actually trades.
b. Domestic government bonds, by tenor. Pre-war the short end (<1 year) loads on the policy rate at β = 0.77 with R² = 0.89; the 1–3 year bucket at β = 0.53, R² = 0.81; the 3–5 year bucket at β = 0.31, R² = 0.53. The further out the curve, the less the policy rate explains, and the more the price is doing its own work — pricing inflation, liquidity, and fiscal risk. Post-24.02.2022 the short-end coupling collapses outright (β = 0.09, R² = 0.04): the NBU raised the rate to 25 % in June 2022 and government-bond yields did not follow immediately. The NBU’s own communication at the time acknowledged it was waiting for government-bond and deposit rates to reprice, which is the tell — administrators don’t wait for the price they set.
Picture 3. NBU policy rate versus government-bond yields and spreads by tenor. The short end tracks the rate; the long end carries its own inflation, liquidity and fiscal premia.
c. Commercial bank lending and deposit rates. Pre-war these are the cleanest transmission story in the system: β = 0.57 for non-financial corporate credit, β = 0.62 for deposits, both with R² > 0.88, both with a one-month lag. Post-war the betas fall to ≈0.30 and R² to ≈0.66–0.68. Even in the tightest peacetime regime the pass-through is partial — credit risk, liquidity, bank competition, and a wartime premium all write the final corporate borrowing rate on top of the policy-rate signal.
The combined reading: the NBU directly sets the corridor and indirectly anchors the very short end of the curve. Outside that narrow zone its signal arrives partially and with a lag — and increasingly so as the instrument lengthens or the regime breaks.
V. Inflation: the market does most of the work
The third myth is the centrepiece — the claim that the central bank sets inflation. We test it in two steps.
Step one: estimate a market-only CPI equation with lagged producer-price inflation, three-month hryvnia depreciation, and 12-month household expectations. The model explains 64.2 % of the variation in year-over-year CPI over August 2014 – March 2026, before any monetary variable enters. Household expectations carry most of the load (β ≈ 1.92); lagged PPI contributes the rest.
Step two: add the 12-month-lagged policy rate to the same specification. R² rises from 64.2 % to 68.3 %, and the rate enters with a negative, statistically significant coefficient (β ≈ –0.47). On a robustness check with core CPI as the dependent variable, the rate coefficient remains negative and significant (β ≈ –0.41), with R² = 0.65.
Picture 4. Actual CPI versus the market-only model and the model with the lagged policy rate added. The monetary variable adds a thin lagged layer on top of a market-driven base.
That four-point lift is real, but it is small relative to the market layer that was already there before any monetary variable arrived. Inflation in Ukraine is born from the market first and gets a thin lagged disinflationary topcoat from the policy rate later. That is not “the NBU set the rate of inflation.” That is the NBU dampening, with a lag, an inflation print whose level was determined elsewhere.
VI. The cross-regime lesson
The pattern across the three myths converges on one reading. The NBU’s signal is tightest where the rule is literally administrative — the corridor and the overnight interbank market — and loosens systematically as we move outward into prices that other players also write. By the time we reach consumer inflation, the policy-rate contribution is a thin lag on top of a market-driven layer that already explains most of the variation. The wartime window is the partial exception: in a crisis the NBU can move proactively, as it did in June 2022, but that proactive step does not translate automatically into government-bond yields, bank rates, or consumer prices either — the long tail of transmission stays partial and lagged even when the headline policy move is decisive.
VII. What I’d say now
The conclusion I keep coming back to is deliberately less complimentary than the one that dominates the Ukrainian public discussion. The NBU is best read as an administrative, constrained, reactive institution. Its signal is tightest at the very short end of the money market and in wartime hryvnia repricing; outside those zones its impact on the broader structure of rates and on inflation is partial, lagged, and widely overstated. The policy-rate decision is not the cause of the macro picture; it is a structurally disciplined response to the macro picture, executed under tighter external discipline since 2015 and especially since 2022.
Damodaran’s bird is the right metaphor — the rooster whose crowing the yard credits with the sunrise it merely accompanies. The practical implication for Ukrainian economic communication, in wartime and toward post-war reconstruction, is that we should stop building narratives of macro-stability on an overstated NBU power over prices. The market sets the rate; the regulator’s task is to be disciplined enough not to obstruct it.
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