On June 2, the Board of the National Bank of Ukraine decided to raise the discount rate to 25% per annum from the current 10%. The changes will come into effect on June 3rd. The NBU hopes that a return to an active interest rate policy will effectively influence the deterioration of inflationary expectations and restrain the flow of hryvnia savings into foreign currency.
The National Bank raises up to 25% – what is the reason for this?
As the NBU explained, the purpose of such a decisive step, along with other measures, is to protect hryvnia incomes and savings of citizens, increase the attractiveness of hryvnia assets, reduce pressure on the foreign exchange market and, as a result, strengthen the ability of the NBU to ensure exchange rate stability and restrain inflationary processes during the war.
The NBU noted that since the beginning of the full-scale aggression of Russia, they refrained from making decisions on the discount rate, since this was justified in the face of a significant psychological shock.
“This approach was justified in the conditions of significant psychological shock caused by the war. In such circumstances, a change in the discount rate had little chance of serving as a factor in stabilizing expectations and an incentive to hold hryvnia assets, in particular, to maintain the fixing of the exchange rate.”
NBU
Until now, the activities of the National Bank in the monetary area, first of all, were aimed at ensuring the smooth functioning of the banking system and payments in the economy. Fixing the exchange rate was accompanied by currency restrictions to reduce the demand for currency and interventions to sell currency by the National Bank to close the residual deficit of currency in the interbank market.
At the same time, new challenges require strengthening monetary policy. In the current conditions, the lack of proper remuneration for the maintenance of hryvnia assets increases the threat of dollarization of the economy and the corresponding loss of resources by the financial system. Also among the unfavorable factors, the NBU names the devaluation expectations of citizens and businesses, which are unstable and sensitive to the development of the military situation, in particular to operational changes at the front, and other situational factors.
The main factor is the increase in inflation
The interventions of the National Bank for the sale of foreign currency increased from 2 billion dollars. USA on average per month in March-April to 3.4 billion dollars. USA in May. Also during May, the difference between the cash market and the official rate increased, which exacerbated the negative effects on the economy from the system of multiple rates due to restrictions on foreign exchange transactions and cross-border transfers.
“Inflationary development requires the return of the National Bank to an active interest rate policy to prevent further deterioration of inflationary expectations and dollarization of the economy”
NBU
War-torn production and logistics fuel inflationary processes. High world energy prices also remain a significant pro-inflationary factor and put pressure on consumer inflation both directly and indirectly due to the growth in production costs of enterprises.
In April, inflation accelerated to 16.4% y/y, including core inflation to 13% y/y. Over the month, prices rose by 3.1%. According to preliminary estimates of the National Bank, inflation continued to accelerate in May in annual terms.
“The National Bank expects that an increase in the discount rate to 25% will be sufficient to ease pressure on the foreign exchange market and stabilize inflation expectations, which in the future will create prerequisites for a transition to a cycle of reducing the discount rate”
NBU
Also, the National Bank decided to expand the corridor of interest rates on monetary transactions with banks in order to create additional space for the revival of the interbank market. From June 3, the rate for refinancing loans will be equal to the discount rate plus 2 c. etc., and for certificates of deposit – the discount rate minus 2 and. P.”.
The NBU expects that the government and banks will adequately respond to the change in the discount rate by a corresponding increase in rates on government bonds and deposits. An increase in the attractiveness of hryvnia savings will contribute to a decrease in demand in the foreign exchange market. This will help avoid further accumulation of imbalances, reduce pressure on Ukraine’s international reserves and gradually solve the problem of multiple exchange rates.
What does it mean for our personal finances?
What is a discount rate? It is essentially the value of money and one of the main instruments of monetary policy. This is the rate of interest, according to which the National Bank lends to private banks. The main reason for the rise is rising inflation. To control inflation, the regulator increases the rate.
As a rule, when raising rates , deposit rates increase . Not instantly, but the trend is observed. The cost of government bonds falls in price when the rate rises , so the state will start issuing new issues with more favorable conditions, and the old ones, less profitable, will not be in demand. The lending rate of banks is growing – the rate on loans is also growing , but this does not always lead to a sharp rise in the cost of everything around, including housing. In the current conditions it is difficult to build any long-term forecasts.
