By KYIV. Nov 6 (Interfax-Ukraine) – The decision to keep rates on transactions of the National Bank of Ukraine (NBU) with other banks on October 25 was supported by 10 out of 11 members of the Monetary Policy Committee (MPC), including pointing out the aggravated problem with delays in the return of foreign currency earnings to individual exporters and weakened in recent months the rhythm of international aid receipts.
“This [keeping rates on the NBU’s transactions with the banks] is important for ensuring moderate inflation and exchange rate sustainability over the forecast horizon. Such a policy will restrain the pressure on the FX market and international reserves as the FX market adjusts to a gradual increase in the exchange rate’s flexibility and the NBU implements its plan to further ease the FX restrictions that exert the most pain on businesses,” the NBU said in a report on the results of the MPC discussion, published on Monday on its website.
Several participants in the discussion said that there is almost no room left to further alleviate inflationary pressure, while the risk of deterioration in inflation expectations, on the contrary, may grow, which could lead to less attractiveness of the hryvnia, taking into account the reduction of deposit rates started by banks following the NBU key policy rate.
At the same time, one MPC member proposed maintaining the rate on overnight certificates of deposit (CDs) but reducing rates on three-month CDs and refinancing loans.
“According to his estimates, With a 3 pp spread between the rates on three-month and overnight CDs, the banks will continue to have adequate incentives to compete for depositors and build up the portfolio of new retail term deposits, this participant estimates,” the release says.
According to his opinion, therefore, banks will be in no rush to cut rates on term deposits.
In addition, it is advisable to slightly lower the rates on refinancing loans, which are currently not in demand due to a significant liquidity surplus, this MPC member said.
As reported, the National Bank, unexpectedly for the market, decided to lower the key policy rate by 4 percentage points on October 27, to 16% per annum, while the majority of market players expected a decrease of 2 percentage points, to 18%. At the same time, the NBU maintained the rates for overnight and three-month CDs and refinancing loans, respectively, at 16%, 20% and 22%.
“The Board of the National Bank of Ukraine decided to set the key policy rate at 16% from October 27, 2023, equalizing it with the rate on overnight certificates of deposit (CDs). Thus, the National Bank is modernizing its operational design of monetary policy according to the floor system,” said then NBU Governor Andriy Pyshnyy.
As a result of the discussion, all MPC members supported the update of the operational design of monetary policy as per the floor system.
