Ukraine central bank reduces key rate 3pp to 19%

The board of directors of the National Bank of Ukraine (NBU) ruled to reduce its key policy rate to 19% from 22% staring April 22, according to its April 21 press release. The reduction of the key rate became possible after decreased inflation risks, including the election of a new Cabinet and the improvement in Ukraine’s current accounts prospects on rising prices on export items, the release said. The key risk remains the postponement of the next IMF tranches. The NBU is going to further ease monetary policy “should risks to price stability abate further, and if Ukraine secures the successful completion of the second review under its Extended Funds Facility with the IMF,” the release said.

On top of that, the NBU decided to amend its policy of working with liquidity instruments. In particular, the regulator will link the interest rate of its key liquidity regulation instrument, the two-week certificate of deposit (CD), to the key policy rate (of 19%). Such a link didn’t exist earlier: the rate for two-week CDs was 20% between mid-July 2015 and yesterday, while the key rate was changing between 30% and 22% during the same period. Also, the NBU will set its overnight CD rate at the key rate less 2pp (implying a decrease to 17% from 18% before) and its interest rate on overnight loans to banks at the key rate plus 2pp (implying a decrease to 21% from 24% before).

Alexander Paraschiy: While the decline in NBU’s key rate is an expected event, it still provides a positive signal for Ukrainian economic agents. However, the more important decision was to link the key rate with main instruments to control banking liquidity. From now on, the key rate will make more sense and have a more direct effect on money markets. Meanwhile, with the decrease in actual NBU rates by 1pp from today, we expect market rates in the Ukrainian banking system to decline about the same amount in the short term.