National Bank of Ukraine lowers key policy rate slightly more than market expected, to 13.5%

MOSCOW. April 25 (Interfax) - The National Bank of Ukraine has decided to lower its key policy rate to 13.5% from 14.5% per annum, Ukrainian media quoted the NBU as saying on Telegram.

Most Ukrainian banking analysts and experts expected a smaller rate cut, to 14%.

The NBU's rate decision reflects easing of actual and expected price pressures and lower risks to inflows of international financial support, and the need to support lending development and economic recovery without posing additional risks to price and financial stability.

In Q1 2024, consumer inflation slowed more rapidly than expected by the NBU. Consumer inflation slowed to 3.2% year-on-year in March. As previously, the NBU is forecasting that inflation will increase moderately in its updated and improved forecast to 8.2% in 2024, from 5.1% in 2023.

Ukraine received $9 billion from international partners in March, and a second tranche of funding from the EU amounting to1.5 billion euros in April. Also, the United States has approved a military and financial assistance package for Kiev. In view of this, Ukraine can count on receiving $38 billion in external budgetary support this year.

"Measures to increase Ukraine's self-sufficiency continue to be taken. The government is strengthening its own resource base and increasing borrowing from the domestic market. The NBU is improving currency control measures. Combined with the resumed regular inflows of external assistance, this will allow financing the planned budget expenditures and supporting the controllable situation on the FX market," the NBU said.

Yield on bank deposits and government securities is higher than inflation, despite decreasing gradually. A moderate cut in the key policy rate should not diminish interest in hryvnia assets, the NBU said.

As well as lowering the policy rate 1 pp, the NBU is also cutting the interest rates on overnight certificates of deposit and three-month certificates of deposit, to 13.5% and 16.5% respectively.

The NBU is lowering the interest rate on refinancing loans more significantly, by 2 pp to 17.5%.

"Also, with the level of international reserves being sufficient, the situation on the FX market being under control, and there being expectations of further international assistance inflows, the NBU anticipates taking in the coming weeks a number of steps to liberalize the FX market," the regulator said.

The baseline scenario of the NBU's forecast envisages a cut in the key policy rate to 13% this year. The NBU will adapt its monetary policy if the balance of risks changes significantly.

The 14.5% policy rate had been in effect since March 15, when it was lowered from 15%.