NBU cuts key policy rate by another 200 bps

The National Bank of Ukraine (NBU) announced on June
11 that it cut its key policy rate by 2.0pp to 6.0%, citing its board’s decision
that day. This is the lowest key policy rate in the history of independent
Ukraine and the second 2.0pp cut in two months. The central bank is continuing
its monetary softening cycle aiming to support the economy amid the gradual
easing of coronavirus quarantine restrictions, the statement said.

The NBU noted that consumer and investment demand is
likely to remain depressed longer than projected in April’s forecast. This
means that consumer inflation will stay below the mid-term target range of 4-6%,
and the decline of Ukraine’s economy might be deeper than expected before.

The regulator also noted that Ukraine resumed
its cooperation with the IMF, which was the key assumption of its
forecast. The IMF’s financing, coupled with connected loans
from the E.U. and the World Bank, will enable fully financing
budget expenditures related to combating the coronavirus. This financing will
also help to build up the country’s international reserves and ease access to
international debt markets.

The NBU also decided to narrow the range of interest
rates on its policy instruments. In particular, the interest rate on overnight
refinancing loans to commercial banks will exceed the key policy rate by 1pp
(instead of 2pp previously), while the interest rate on deposit certificates
sold by the NBU will be 1pp below the key policy rate (instead of 2 pp
previously). This change will help to keep interbank interest rates closer to
the key policy rate.

Future NBU monetary policy will depend on how deep
consumer demand will decline and on how fast business activity will be
restored.

Evgeniya Akhtyrko: The rate
cut is the NBU’s latest effort to stimulate consumer demand and business
activity amid an unfavorable global environment. However, this action might not
succeed in stimulating Ukrainian business. Firstly, Ukraine’s commercial banks
are likely to have their own risk assessments of potential borrowers and the
economy overall. Secondly, the current cost of banking resources is high as
they were formed during a time of higher interest rates.

Meanwhile, the rate cut is likely to result in
declining interest rates at the domestic debt market. Having secured IMF and
other international financing, the government now is less dependent on the
receipts from the placements of domestic bonds, and it can afford to be bearish
on interest rates.