The vast majority – nine out of 11 – members of the Monetary Policy Committee (MPC) of the National Bank of Ukraine (NBU) at a meeting on March 13 supported reducing the key policy rate from 15%, while five proposed lowering it to 14% per annum instead of the final decision to limit it to 14.5%, according to the results of the MPC discussion published on Monday.

"Inflation dynamics, the FX market situation, and lower uncertainty over international aid are better outcomes than the NBU projected and make for a good reason to loosen the interest rate policy in March already, these MPC members said. Under current conditions, cutting the key policy rate by 1 pp would pose no threats to macrofinancial sustainability, they said," the NBU said in a press release, describing the position of supporters of bigger rate easing.

In their opinion, such a step would help revive lending and support economic recovery, one of the NBU's priority tasks. Economic uncertainty has recently subsided, making it possible to look more confidently into the future, these MPC members said. The optimism of these MPC members is fueled by the stepped-up efforts of international partners to provide financial aid, and by the renewed discussion on using frozen Russian assets to Ukraine's benefit.

One discussion participant said it remains in international partners’ interest to support Ukraine. Some delays in financing are mainly associated with electoral cycles in many Western countries. A scenario where they cease to provide funding to Ukraine is unlikely. But even in the worst-case scenario, support will probably stay above the critical level.

One MPC member said that some uncertainty and risks will persist in wartime. However, not all of them are adverse. Positive scenarios may also materialize. Focusing on risks and a conservative course of action may hold back economic recovery.

Supporters of reducing the rate by 1 percentage point (pp) in conditions where the market expected it to remain the same, urged not to be afraid of such a surprise for market participants, pointing out that the NBU's previous communications should not restrain decision-making, given that the situation is highly volatile.

The NBU has always emphasized that the expected interest rate trajectory is only a forecast, not a commitment. At the same time, the NBU has repeatedly declared its readiness to respond flexibly to significant changes in the balance of risks. This is precisely what is proposed: for the NBU to seize a window of opportunity that has opened up.

Four members of the MPC supported a reduction of the key policy rate to 14.5% in March, saying such a step is sufficient at this point. The favorable macrofinancial trends are sufficiently sustainable and have presented a window of opportunity to ease monetary policy as early as March, these MPC members said. However, they said they favor a more gradual reduction of the key policy rate and that a 0.5-pp step would be sufficient at this point.

"The war appears set to drag on. Uncertainty about international aid remains rather high. And so, these MPC members said, the NBU should proceed with its measured and consistent monetary policy, which has proved effective," the NBU said in the press release.

They added that it is necessary to follow the Strategy and the NBU's previous statements, according to which the central bank will prioritize easing the most burdensome FX restrictions, rather than a quicker lowering of the key policy rate.

"It is better to take a moderate step, which is more than sufficiently justified from a macroeconomic perspective and will not cause an imbalance of expectations," the arguments of representatives of this four MPC members are indicated in the press release.

Finally, Two MPC members called for maintaining the key policy rate at 15% in March. These discussion participants agreed that the prerequisites for easing the monetary policy could be met earlier than the January macro forecast projected. They also emphasized the importance of pursuing a careful and consistent monetary policy that is clear to market participants and that would maintain their confidence and at least partially alleviate uncertainty, which is unprecedentedly high amid the war.

In their opinion, a revision of the macro forecast in April will make it possible to more fully assess the development of current macroeconomic trends and properly ensure their sustainability. Among other factors for caution, they pointed out that core inflation is somewhat higher than the trajectory of the forecast the NBU made in January, exchange rate expectations remain sensitive to current exchange rate dynamics and may react to a weakening of the hryvnia, a rushed easing of the interest rate policy may lower the attractiveness of hryvnia instruments, and the probability that less favorable scenarios than the baseline one become reality remains rather high.

These two members of the ILC also called for taking into account the expectations of the market participants that the key policy rate would be kept unchanged. They said that the NBU should therefore limit itself to articulating forward guidance on a possible reduction of interest rates by the NBU sooner than predicted in the January macro forecast. This will make it possible to avoid surprising the market, substantiate in detail the reasons for future rate cuts, and generate appropriate expectations to prevent potential adverse responses.