Ukraine's nat'l bank hikes key policy rate from 10% to 25%, exceeding market expectations

MOSCOW. June 2 (Interfax) - The board of the National Bank of Ukraine (NBU) has abandoned the previous decision to secure the key policy rate after February 24, and has hiked the rate substantially from 10% per annum to 25% pa, exceeding market expectations.

"Along with other measures, this resolute step aims to protect households' income and savings in the hryvnia, raise the attractiveness of hryvnia assets and reduce pressure on the forex market, thus enhancing the NBU's capability to maintain the stability of the exchange rate and restrain inflation processes [...]," the NBU board said in a press release posted on its website.

The NBU said a slight increase in the key policy rate would have had no significant influence on the financial and economic system because the monetary transmission mechanism has only a limited effect during current events in the country. Also, this would have resulted in expectations of further increases in the key policy rate and, consequently, depositors taking a wait-and-see approach and, investors having weak interest in hryvnia assets.

In addition, to revive interest in hryvnia assets, their yields must exceed expected inflation rates.

The NBU said that holding the rate at 10% had been justified by "strong psychological pressure" caused by the military operation, but "the gradual adaptation of Ukraine's economy and the psychological shock giving way to the economic decision-making logics of businesses and households require changing the approach to monetary policy."

"As yields on hryvnia assets are low now, the threat has grown that the economy dollarization might rise and the financial system might lose respective resources," the regulator said.

"Although Ukraine's international reserves are still sufficient thanks to funding from international partners, risks to macrofinancial stability have risen in the medium term. If yields on hryvnia assets do not rise sufficiently, international reserves will keep depleting rapidly and imbalances will build up in the economy," it said.

The NBU expects the government and banks will respond adequately to the hike in the key policy rate by raising interest rates on domestic government debt securities and deposits.

The NBU has also decided to widen the interest corridor for monetary transactions with banks to provide additional room for reviving the interbank market. More specifically, from June 3, the interest rate on refinancing loans will equal the key policy rate plus 2 pp and rise from 11% to 27%, while that on certificates of deposit will be the key policy rate less 2 pp and rise from 9% to 23%.

The NBU in June 2022 narrowed the corridor for monetary transactions with banks to the key policy rate +/- 1 pp, lowering the policy rate from 8% to 6% and the rate on refinancing loans to 7% and that on certificates of deposit to 5%.

The Finance Ministry currently places domestic bonds at between 9.5% and 11.5%, depending on maturity.

Meanwhile, the NBU plans to resume publishing macroeconomic forecasts in July, NBU Deputy Governor Serhiy Nikolaichuk said.

"We're thinking already now that we should resume our standard cycle of preparing macroeconomic forecasts, and we expect that, at the next meeting of our Monetary Policy Committee as early as in July, we'll discuss a forecast in detail and will begin publishing its key figures," he said at a press briefing on Thursday.

Ukrainian media quoted Nikolaichuk as saying that he expected inflation to grow gradually within the next few months, although not as dramatically as in the previous months.