When 0.25 is more than 5: Specific features of the domestic interest rate8 October 2015
An investment banker Igor Mazepa explains why reduction of FRS rate for 0.25 point is more important to our economy than decrease of the NBU discount rate by 5 points.
In mid-September, the entire world waited - heart aflutter - for news from the meeting of the USA Federal Reserve System (FRS), which could resolve to increase the base interest rate by 0.25 percentage points from current levels 0.0-0.25%. Such step would mean more expensive mortgages, car loans, consumer loans, as well as the revision of interest rates by a number of central banks in developed countries. In fact, this solution determined the level of liquidity in the world, and thus set the pace of development of the global economy. Not to exaggerate, Mrs. Yellen, Chairwoman of the US Federal Reserve, virtually kept her foot on the brake of the world economy.
Changes for appearance
A week after the Federal Reserve did not dare to raise the rate the Board of the National Bank of Ukraine adopted at first glance the revolutionary decision to reduce its interest rates by as much as 5 percentage points - up to 22% from 27%. It would seem, by analogy with the US discount rate, this should affect everything that happens in the country. Or at least, to revive the economic activity.
But Ukraine is not the USA. And so, the reduction of the NBU discount rate, generally speaking, it was just an interesting event without any consequences.
Why so? The answer is an anatomy of our economy. The fact is that numerous structural imbalances, such as a fixed hryvna rate or energy subsidies, generate high inflation in Ukraine, which makes credits very expensive for all. Poor protection of property rights (just to mention court «permissions" not to pay loans) only increases the cost of lending. As a result, interest rates even in quiet times are calculated in double digits, which make this resource unavailable for the normal business. Statistics say that the Ukrainian economy last year invested in its development mainly its own earned money (70.5%), and funds of the national/local budgets, and only 9.9% - credit money. As a result, loans to the real economy are the "rudimentary" tool, and an interest rate is a figure, having importance for a limited circle of people.
Then what is the essence of changes of the discount rate in Ukraine? Well, first, it is trendy. The Central Bank should have a discount rate and signal on its intentions with changes in this rate. And, second, the discount rate refers to the segment of the so-called speculative purchases of securities, as well as purchase of foreign currencies.
Let me remind you, the NBU raised an interest rate sharply in early March (up to 30% from 19.5%) just after the hryvna collapsed by 30 UAH / $. With this step, the NBU discouraged from taking the hryvna loans for currency speculation, thus loosening the speculative demand for the dollar and calming down the foreign exchange market. Since then, the situation has stabilized and the hryvna has strengthened. And when foreign creditors agreed to write off more than $ 3 billion debt, and even to delay it repayment for four years, it became clear that the risks of the currency market destabilization are negligible. Obviously, in such circumstances the National Bank felt it possible to reduce the discount rate and thereby demonstrate their optimistic expectations. In other words, all the NBU wanted to say was "we are not afraid of currency swings."
When the NBU discount rate will get some meaning for our economy? This will happen only when interest rates will be expressed in single digits to allow the majority of businessmen to take loans. And this, in turn, will happen not earlier than inflation falls down to 5% per year. The National Bank's intention to switch to the so-called inflation targeting aims at achieving such price stability. But for the time being, change of the FRS rate for 0.25 percentage point would be more important and visible event for us, than the change of the NBU rate by as much as five percentage points.
Igor Mazepa, Director General of Concorde Capital Investment Company, Chairman of the Business Council "The Price of the State"