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Ukraine central bank increases discount rate by 3pp to 12.5%

Ukraine central bank increases discount rate by 3pp to 12.5%

17 July 2014

The National Bank of Ukraine (NBU) increased its discount rate by 3pp to 12.5% from 9.5% on July 16, its highest level since 2001. As a consequence, the overnight refinancing rate was increased to 17.5% from 14.5% previously. The NBU said in its explanatory note that its goal with the hiked rates is to fight inflation.

 

Alexander Paraschiy: The NBU has finally started inflation targeting, yet this step will hardly affect dynamics promptly since the discount rate has little impact on food prices, which comprise more than 50% of the CPI. However, this move is a good way to probe transmission mechanisms, i.e. gauging the impact of discount rate changes on monetary aggregates in the context of a free float.

 

Provisionally, we anticipate that this measure will be effective only through the hryvnia exchange rate – more expensive hryvnia resources against the backdrop of a stabilized ForEx market very likely will lay the ground for the national currency’s strengthening. Still, it is not clear how soon consumer prices might react to a stronger hryvnia.

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