Ukraine: Central Bank cuts interest rate; fine tunes monetary policy framework
April 21, 2016
Amid stabilizing inflationary pressures in Ukraine’s battered economy, the National Bank of Ukraine (NBU) decided to cut the discount rate from 22.00% to 19.00% at its 21 April monetary policy meeting. The result surprised market analysts who had not expected a change in the discount rate. In addition, the NBU announced that it was streamlining the operational framework of monetary policy in an effort to improve transmission and that it was converging the discount rate and the key policy rate.
In its accompanying statement, the Central Bank outlined that the decisions come against a backdrop of easing price pressures thanks to prudent monetary and fiscal policy as well as weak domestic demand. The Bank added that inflationary pressures have abated notably in recent months and that political uncertainty has diminished since the approval of a new government. On top of this, the resumption of transit of goods through Russia and a moderate recovery in export prices have contributed to an easing in downside risks to the inflation projection, however, further delays to the IMF program still remain the largest downside risk to the Bank’s forecast.
On top of the Bank’s monetary decision, the NBU announced a number of tweaks to its framework to streamline monetary policy. The Bank explained that going forward the discount rate will be set at the same level as the key policy rate in order to steer short-term interbank market interest rates more effectively. At this time, the 14-day certificates of deposits (CD) interest rate serves as the key policy rate. The 14-day CD interest rate has a significant impact on money market conditions as it accounts for the largest share of certificates of deposits placed at banks. The Bank highlighted that converging the discount rate at the 14-day CD interest rate will help improve transmission of monetary policy. In addition, the NBU announced a narrower corridor of interest rates on standing facilities established at 200 basis points around the key policy rate.
Looking forward, the Bank suggested that the key policy rate could be cut further. The Bank emphasized that, “should risks to price stability abate further, and if Ukraine secures the successful completion of the second review under the Extended Fund Facility Arrangement, the NBU may move ahead with monetary easing.” In addition, the Bank highlighted that after a resumption of cooperation with the IMF, exchange rate controls can be eased given the current economic situation and the balance of risks. The next monetary policy meeting is scheduled for 26 May.