Ukraine central bank raises discount rate 3pp to 9.5%

The National Bank of Ukraine raised its discount rate by 3.0pp to 9.5% on April 14, according to its web site. The emergency refinancing rate was revised to two discount rates (19.0%) versus three discount rates previously (19.5%). The NBU hiked the overnight refinancing rate to 14.5% from 7.5%. Deposit certificate rates increased to 4.5% from 1.5%.

Alexander Paraschiy: The NBU is continuing to balance itself between a rock and a hard place. On the one hand, the NBU has begun to pursue inflation-targeting and withdraw totally from the ForEx market. On the other hand, after sharp a hryvnia decline on the back of relaxed liquidity, the National Bank is trying to increase the cost of funding for the banking system. The outcome on the exchange rate of this maneuvering remains unclear, especially in light of the effectively reduced cost of the emergency refinancing (to 19.0% from 19.5%).

Still, this seemingly radical change in the discount rate (it was previously reduced by only 1pp in two steps) and refinancing rate means that the NBU has finally started reacting to the extreme volatility on the ForEx market. We anticipate that the main effect on the hryvnia will be observed after the IMF program is approved (in late-April/early May) and the first wire arrives shortly after.