14:47 02.06.2022

NBU for first time since introduction of martial law raises key policy rate to 25% per annum

3 min read
NBU for first time since introduction of martial law raises key policy rate to 25% per annum

The National Bank of Ukraine (NBU) raised the key policy rate from 10% to 25% per annum, according to a press release on the NBU website.

"The Board of the National Bank of Ukraine has decided to raise the key policy rate to 25% per annum. Along with other measures, this resolute step aims to protect households’ income and savings in the hryvnia, raise the attractiveness of hryvnia assets, reduce the pressure on the foreign exchange market, and thus enhance the NBU's capability to maintain the stability of the exchange rate and restrain inflation processes during the war," the NBU said.

According to the report, a decisive rise in the key policy rate will spur investors’ interest in hryvnia assets, while also easing pressures on international reserves and reining in inflation.

The NBU believes that a slight increase in the key policy rate would have had no significant influence on the financial and economic system. The first reason for this is that the monetary transmission mechanism has only a limited effect in wartime. Second, this would have resulted in expectations of further increases in the key policy rate and, consequently, depositors taking a wait-and-see approach and, investors having weak interest in hryvnia assets.

Third, to revive interest in hryvnia assets, their yields must exceed expected inflation rates.

The press service of the NBU said that at the start of the large-scale russian aggression, the NBU decided to refrain from taking any key policy rate decisions. This approach was justified by a strong psychological pressure caused by the war. At the same time, the gradual adaptation of Ukraine’s economy and the psychological shock giving way to the economic decision-making logics of businesses and households require changing the approach to monetary policy.

"As yields on hryvnia assets are low now, the threat has grown that the economy dollarization might rise and the financial system might lose respective resources," the NBU said.

Although Ukraine's international reserves are still sufficient thanks to funding from international partners, risks to macrofinancial stability have risen in the medium term. If yields on hryvnia assets do not rise sufficiently, international reserves will keep depleting rapidly and imbalances will build up in the economy, the central bank said.

The NBU expects that the government and the banks will respond adequately to the hike in the key policy rate by raising interest rates on domestic government debt securities and deposits.

An appropriate response of market interest rates to the key policy rate hike will make hryvnia assets, including domestic government debt securities, more attractive, preventing household income and savings from being eroded by inflation, the regulator said.

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