NBU Raises Discount Rate by 2 p.p. to 10%

The National Bank of Ukraine announced it has raised the discount rate by 2 p.p. from 8% to 10%. The Bank states in its message that the increase was based on forecasts of trends in money-and-credit markets, as well as on the Cabinet’s forecasts of social and economic development in 2008.Oleksandr Klymchuk: In response to high inflation, the NBU continues to tighten its policy: in mid-December the Bank raised overnight refinancing rates by 2.5% (to 14.5% for loans secured by government bonds and to 15% for unsecured loans). Still we believe that these moves will have little effect and the major risk-factor for inflation on the part of monetary authorities is NBU interventions on the FX market. According to our estimates, in 2007 the NBU was saturated with an excess supply of foreign currencies of about UAH 40 bln (~USD 8 bln), which almost equalled the increase in the country’s monetary base. We expect that the NBU will try to decrease interventions in 2008 in an attempt to suppress the expansion of the monetary base.