Keeping 6% rate on Oct 21 supported by 9 out of 10 members of NBU committee, one was in favor of 5.75%
Keeping the key policy rate at 6% was supported by nine out of 10 members of the Monetary Policy Committee (MPC) of the National Bank of Ukraine (NBU) at the meeting on October 21, given the heightened uncertainty and the symmetrical balance of inflation risks, the regulator said on Monday on its website.
According to the report, one MPC member advocated cutting the key policy rate by 0.25 bp, to 5.75%. The worsening of the pandemic and the possible tightening of quarantine restrictions will depress household incomes and significantly hold back the already uneven recovery of domestic demand and economic activity, this MPC member said.
The NBU said that given the expected increase in inflation risks over the forecast horizon, the key policy rate should be kept at the 6% level until the end of 2020, most MPC members suggested.
The MPC members also assumed that elevated uncertainty in the economy and deteriorating expectations would prevent banks from actively lowering interest rates on deposits and loans.
"Households’ inflation expectations for the next 12 months approached the level of interest rates on hryvnia-denominated one-year retail deposits. This limits the ability of banks to reduce interest rates without causing a deterioration in the term structure of funding, as depositors begin to prefer shorter-term deposits or demand deposits," the majority of the MPC members said.
Sovereign risks have recently risen significantly, several MPC members believe. In particular, market participants are concerned about possible delays in receiving the next tranche from the IMF. Thus, lowering the key policy rate in real terms further into negative territory will increase the risk of capital outflows from the country.
"In these conditions, even by significantly reducing the key policy rate, the NBU is unlikely to convince market participants that the key policy rate will remain low in the medium and long term," they said.
The press service said that in order for interest rates to decrease further, it is increasingly more important to step up cooperation with the IMF and other international partners, to continue to pursue a moderate fiscal policy, to make progress in reforming the judiciary and law enforcement agencies, to strengthen protection of creditor rights, and to de-shadow the economy, the MPC members said.
As reported, the decision to set the key policy rate at 6.0% per annum was approved by the NBU Board at the monetary policy meeting held on October 22, 2020. Nine out of ten MPC members backed the decision, and one MPC member advocated cutting the key policy rate by 0.25 bp, to 5.75%.
The press service of the NBU said that all ten members of the NBU MPC attended the meeting, including NBU Governor Kyrylo Shevchenko, First Deputy Governor Kateryna Rozhkova, deputies Yuriy Heletiy, Yaroslav Matuzka, Dmytro Sologub and Oleksiy Shaban, as well as Director of the Financial Stability Department Vitaliy Vavryshchyk, Director of the Monetary Policy and Economic Analysis Department Volodymyr Lepushynsky, Director of the Open Market Operations Department Oleksiy Lupin and Director of the Statistics and Reporting Department Yuriy Polovniov.