Ukraine central bank tightens monetary policy

The Monetary Policy Committee of the National Bank of Ukraine (NBU) approved on March 3 a series of decisions tightening monetary policy. In particular, the NBU (a) increased the policy rate to 30% from 19.5% with subsequent adjustment of discount rates, (b) increased reserves requirements for banks, (c) limited the monetary base increase for 2015 to UAH 91 bln and (d) committed itself to quarterly NBU profit transfers to the budget, as compared to the pactice of making advance payments.

Alexander Paraschiy: These decisions will have a positive effect on stabilizing the ForEx market. No doubt a 30% discount rate is not good for economy but it’s aimed at addressing extreme exchange rate volatility, which is not good either. A temporary hike in the discount rate is justified in order to smoothen the hryvnia exchange rate.

Another positive decision is quarterly profit payments to the budget. Advanced profit wires used to be a channel for hryvnia printing, which has been heavily criticized by the IMF. Committing to send profit only after it is earned neutralizes this source of devaluation risk.

Meanwhile, the commitment to keep monetary base growth under limits is not very encouraging since in 2014, a large part of printed hryvnias was simply neutralized with ForEx interventions, which tempered monetary base growth (+8.5%, or by UAH 26 bln). Given that the authorities are expecting substantial external support, their UAH 91 bln limit tells us little in light of plans for more hryvnia printing.