The National Bank raised the discount rate to a record high

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НБУ

The National Bank raised the discount rate by 1,500 basis points – up to 25% per annum from the current 10% – this is the maximum since 2015, according to the NBU website on Thursday, June 2.

“The Board of the National Bank decided to raise the discount rate to 25% per annum. The purpose of this decisive step, along with other measures, is to protect hryvnia incomes and savings of citizens, increase the attractiveness of hryvnia assets, reduce pressure on the foreign exchange market and, as a result, strengthen the ability of the National Bank to ensure exchange rate stability and restrain inflationary processes during the war,” the message says.

The NBU believes that such an increase in the discount rate will revive interest in hryvnia assets, reduce pressure on international reserves and affect inflation.

A slight increase in the key rate, according to the NBU, would not have had a significant impact on the financial and economic system due to the limited effectiveness of the monetary transmission mechanism during the war, as well as the formation of expectations for further increases in the discount rate and, accordingly, the waiting position of depositors and a slight interest in hryvnia assets.

In addition, in order to revive interest in hryvnia assets, their profitability should exceed the expected inflation rates, the NBU says.

The Central Bank recalled that the abstention from making decisions on the discount rate at the beginning of the Russian invasion was justified in the face of a significant psychological shock caused by the war, however, the gradual adaptation of the Ukrainian economy and the replacement of the psychological shock with the economic logic of decision-making by business and the population require a change in approaches to monetary policy.

“Currently, in the absence of proper remuneration for the maintenance of hryvnia assets, the threats of dollarization of the economy and the corresponding loss of resources by the financial system have increased,” the message says.

It is indicated that despite the still sufficient level of Ukraine’s international reserves, thanks to receipts from international partners, the risks to macro-financial stability have increased in the medium term, and in the absence of a significant increase in the profitability of hryvnia assets, the rapid depletion of international reserves and the accumulation of imbalances in the economy will continue.

The NBU expects that the government and banks will adequately respond to the change in the discount rate by a corresponding increase in rates on government bonds and deposits, which will increase the attractiveness of hryvnia assets, which will protect the savings and income of citizens from inflation.