The essence of the inflation targeting regime lies in the public announcement of quantitative targets for inflation and the central bank's commitment to reach them over the medium term.

Monetary policy decisions rely on the inflation forecast. The interest rate is the main monetary tool and operational benchmark under this monetary regime. If the inflation forecast is above the target, a monetary policy tightening is applied to restrain inflation – that is, the interest rate is raised. And vice versa, if the inflation forecast is below the target, a monetary policy easing is used, which implies lowering the interest rate.

By changing rates for its operations with banks, the central bank influences conditions under which banks make deals with each other on the money market and therefore influences the cost of short-term loans. As capital flows from one sector of the financial market to another, the cost of short-term funds impacts banks’ interest rates on loans and deposits for businesses and households, the hryvnia exchange rate, and prices of other financial assets.

In the end, by changing the interest rate, the central bank indirectly influences macroeconomic indicators, such as GDP and inflation. This mechanism is called the monetary transmission mechanism.

The NBU de facto adopted inflation targeting in early 2016, which was preceded by a long preparation to create all critical preconditions for implementing the regime. The first stage (until 2015) covered the technical side, in particular developing macroeconomic models and the quarterly forecast cycle. At the second stage (H1 2015), the institutional foundation was formed, including independence of the NBU in choosing ways to reach its target, eliminating fiscal dominance, and changing the process of making monetary policy decisions. The third stage started in H2 2015 and was dedicated to implementing all key elements of inflation targeting.

In order to make its monetary policy more transparent during the transition to the new regime, the NBU published the Inflation Targeting Transition Roadmap (UKR), defining areas on which the central bank had to work in order to create all the preconditions for the success of inflation targeting in Ukraine. In particular, it described steps needed to ensure effective coordination with the NBU Council, the government of Ukraine, the IMF, and the State Statistics Service of Ukraine; bring tools, mechanisms, and procedures in line with the standards of the inflation targeting regime; reinforce the analytical support of monetary policy decisions; and raise public awareness and understanding of the central bank’s monetary policy.

Improving the effectiveness of the monetary transmission mechanism is also a key task of the NBU. This envisages developing the markets for government securities and derivatives, liberalizing the FX market, and revamping the banking sector. It will provide the NBU with more control over inflation processes in the country.

Inflation targeting was de jure adopted as the monetary regime in Ukraine after the NBU Council approved the Monetary Policy Guidelines for 2017 and the Medium Term in December 2016.