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NBU Council allows central bank to buy state bonds

NBU Council allows central bank to buy state bonds

3 April 2020

The Council of the National Bank of Ukraine (NBU) removed
on Mar. 31 a restriction on the NBU on purchasing local government bonds, the
finclub.net news site reported on Apr. 2, citing a council resolution. The ban
was introduced in July 2018. The council also recommended the NBU board “to
create preconditions for easing the consequences of economic recession and
preserving price and financial stability.” 

 

In particular, the council recommended the NBU board
to determine the amount of the possible purchase of local bonds on the
secondary market that won’t affect financial stability. It also recommended the
government to liberalize the primary market to allow non-banking institutions
to purchase the bonds at state auctions.

 

At the same time, NBU board member Oleh Churiy told an
Apr. 3 press briefing that the regulator has no plans to purchase local bonds.

 

Alexander Paraschiy: Ukraine’s
legislation prohibits the NBU from lending money to the state directly,
including via local bond purchases on the primary market, directly, or via
state banks. On the other hand, it allows the central bank to purchase bonds on
the secondary market.

 

Taking into account that Ukraine’s state budget
deficit will be exceptionally high this year, due to coronavirus-related
issues, and that the options to finance the deficit on the open markets are
limited, there could be a need for the NBU to get involved. Therefore, allowing
it to purchase state securities on the secondary market looks logical.

 

This additional channel of currency issuance seems to
contradict the NBU’s primary objective of targeting inflation. But it looks
like a measure that Ukraine won’t be able to avoid amid the current crisis.
Time will tell whether the NBU will have to help the state budget with printing
new money.

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