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The National Bank of Ukraine Unveils Changes to the Operational Design of Monetary Policy

1 September  2017

Press Release


In September, the National Bank of Ukraine plans to change the operational framework of monetary policy to enhance the efficiency of the central bank’s monetary policy aimed at ensuring low and stable inflation. To achieve this goal, the NBU intends to start conducting CD (certificates of deposit) placement operations with a three-month maturity. These plans were unveiled at a meeting between the NBU top management team and representatives of treasury departments of Ukrainian banks, which featured  NBU Deputy Governor Mr Dmytro Sologub, Director of the Monetary Policy and Economic Analysis Department Mr Sergiy Nikolaichuk, Director of the Open Market Operations Department Mr Sergiy Ponomarenko and over 30 representatives of banks.


Presently, as the Ministry of Finance of Ukraine does not issue three-month government bonds and interbank market operations are conducted with a maturity of up to 14 days,  it is currently impossible to build a yield curve for debt instruments denominated in hryvnia with maturities from one to three months, said Mr Ponomarenko in his speech on “The Development of Financial Markets: Recent Changes and Near-Term Plans. This makes the price-setting process for other instruments, particularly FX forwards, more difficult.  CD placement operations with a three-month maturity should address this shortcoming, help build a yield curve and increase the effectiveness of the transmission mechanism of the NBU’s monetary policy.


“We expect these CDs to be actively traded in the secondary market, would   jump-start this market and increase its liquidity,” said Mr Ponomarenko.


According to the NBU’s estimates, the issuance of three-month CDs will neither lead to an increase in the amount of CDs issued nor hamper efforts to restore lending. Currently, CDs account for less than 3% of banking assets. Therefore, banks have enough resources to ramp up lending.


Long-maturity CDs to be issued  throughout four consecutive weeks are expected to be redeemed simultaneously on the same day. For CDs to be redeemed on the same day, the maturity of CDs to be issued throughout a four-week period will be shortened by seven days each time CD placement operations are conducted (the subsequent issue is offered for sale). For example, during the first week of a four-week period three-month CDs will be issued with a maturity of 91 days, next week CDs will be issued with a maturity of 91 days “minus” seven days. In a week, the maturity of CDs will be further shortened by 14 days (91 days “minus” 14 days). During the last week of a four-week period CDs will be issued with a maturity of  91 days “minus” twenty-one days.


Three-month CDs are scheduled to be first issued on 13 September 2017. CDs with a three-month maturity will be issued through a single rate tender once a week, on Wednesday.


Beginning 11 September 2017, the NBU will cease the practice of holding 14-day CD placement tenders. Instead, 14-day CD placement tenders will be held twice a week, on Tuesday and Thursday. Overnight CD placement tenders will be held daily.


Changes to the operational design of monetary policy will enhance the NBU’s ability  to influence the inflation rate through monetary policy implementation. In his speech entitled “NBU’s Monetary Policy: Applied Conclusions”, Mr Nikolaichuk underlined that the NBU remains committed to the priority objective of of pursuing low and stable inflation. The NBU has to attain its mid-term inflation target of 5%+/- 1 ppt. This inflation target will be achieved gradually,” said Mr Nikolaichuk


The development of financial markets will also contribute to the achievement of the inflation target. To this end, the NBU proposes some changes to the operation of the interbank FX market.


First, the NBU proposes to:


      repeal a requirement for the mandatory registration of interbank agreements in the Val_Kli  and CredInfo2 systems. Instead, the NBU will receive data on interbank agreements based on data offered by Bloomberg and Reuters trading systems. These measures will help mitigate operational risks faced by banks and enable the NBU to access real-time data on agreements rather than receive information at the end of a business day, as is the case now  Following these changes, the NBU intends to adopt a new methodology for calculating  the official hryvnia exchange rate. The official hryvnia exchange rate will be calculated as a weighted average of the exchange rates quoted in the agreements available in the trading system with extreme values being  cut off and excluded from the computations;


      Second, the NBU intends to relax FX regulation and controls by removing  limits on net FX purchases by banks. Currently, limits on net FX purchases restrain banks' presence in the FX market. Therefore, once the aforementioned measures are implemented, market liquidity will increase, thus paving the way for easing surrender requirements.


      Additionally, the NBU intends to repeal a requirement for banks to transfer funds in advance to a separate account  prior to FX purchases in the interbank FX market (under the current Rule T+1). Therefore, the current market exchange rate of the hryvnia and its movements will become a key input for decision-making purposes regarding NBU interventions. Going forward, this will lead to a reduction in the number of FX auctions and more frequent use of FX interventions.


Additionally, the NBU intends to allow banks to pre-deposit collateral against NBU loans  and pledge foreign currency as collateral against overnight loans.


The NBU intends to maintain a constructive dialogue with the expert community and financial market participants. Going forward, the central bank plans to hold workshops on monetary policy for other stakeholders, including academia and media representatives.



Last modification   01.09.2017