Ukraine: Central Bank hikes interest rate to 15-year high amid downward economic spiral
March 4, 2015
On 3 March, the National Bank of Ukraine (NBU) decided to raise the discount rate by 10.5 percentage points from 19.5% to 30.0% effective 4 March. The discount rate will now be at the highest level since 2000. The Bank’s announcements come amidst a catastrophic economic situation for Ukraine, as policy makers attempt to halt the country’s downward economic spiral. In addition to raising the discount rate, the NBU announced a number of other policy changes designed to stabilize the money market.
In its accompanying statement, the Central Bank commented that Ukraine faced a significant acceleration in inflation in January, driven largely by the significant devaluation of the hryvnia. The Bank commented that the foreign exchange market is in “distress,” mainly due to expectations that the conflict in Eastern Ukraine will continue. Against this background, the NBU decided to increase banks’ reserve requirements in order to reduce the excessive liquidity of the country’s banking system and stem downward pressure on the hryvnia. In addition, the NBU approved the new IMF program targets of monetary aggregates. Included in the program is an increase in the monetary base and a reduction in the growth of government bonds in the Bank’s profile.
Going forward, the Bank stated that the introduction of these policy measures will help relieve tension in the money market, stabilize the exchange rate and stem inflationary pressures in the medium term. Moreover, the Bank added that once there are signs of stabilization in Ukraine’s macro-economic indicators, the NBU intends to loosen monetary policy gradually and abandon these new regulations.