Governor of the National Bank of Ukraine Sergiy Arbuzov held a regular meeting on monetary issues on 23 February 2012, which was attended by Yurii Kolobov, Deputy Governor of the National Bank of Ukraine Ihor Sorkin, and senior employees of the structural units whose functions include the implementation of the monetary policy.
During the meeting attention was drawn to the ongoing positive trends in the economic development of Ukraine. In particular, in January 2012 the BOP current account showed a surplus of USD 0.4 billion for the first time in 12 months. Despite the deterioration in the weather conditions at the end of January that affected the dynamics of development of some industries, industrial output increased by 2% in January following a decline of 0.5% year-on-year in December 2011.
Positive trends continue to prevail in inflation dynamics, which is a top priority for the National Bank of Ukraine. In particular, the annual rate of consumer price inflation stood at 3.7% in January, which is comparable with the corresponding figure in the United Kingdom (3.6%) and lower than CPI annual inflation recorded in January in the following countries: Russia (4.2%), China (4.5%), Hungary (5.5%), Kazakhstan (5.9%) and Brazil (6.2%).
The meeting participants feel confident that the above-mentioned results were achieved due to the joint and coordinated efforts made by the National Bank of Ukraine and the Government. The monetary policy pursued by the National Bank of Ukraine, which facilitated the maintenance of overall equilibrium in the market and reduced negative expectations triggered by instability and uncertainty in the European markets, played a significant role in maintaining macroeconomic and price stability.
The meeting participants pointed out that slowing inflation enabled the National Bank of Ukraine to ramp up lending through monetary mechanisms. Over the past several months, measures in the sphere of regulating liquidity of the banking system have been taken. In particular, the National Bank of Ukraine has expanded the provision of liquidity support through the refinancing mechanism; a certain amount of required reserves has been transferred from the separate account to the bank correspondent account; the terms have been extended and certain restrictions on carrying out direct repo transactions have been lifted.
The above-mentioned measures enable banks to manage their own liquidity in a more flexible way, which is of great importance in determining their lending policy.
Certain incentives were given through application of the interest rate policy levers. In the context of declining inflationary risks, the National Bank of Ukraine reduced interest rates on overnight credits extended through standing facilities. The interest rates were reduced twice (23.01.2012 and 14.02.2012) by 0.25 percentage points, standing at 8.75% on overnight credits against a collateral of government T-bills and 10.75% on unsecured (blank) credits.
The above-mentioned measures contribute to a downward trend in the value of national currency funds. As of 23 February 2012, the average weighted value of national currency loans went down from 17.2% to 15.3%, whereas that of deposits declined from 11.1% to 10.4%.
It should be noted that the measures taken by the National Bank of Ukraine are in line with global trends in the financial market regulation. The risks of slower economic growth currently outweigh the risks of higher inflation, having disturbed the balance of risks in many countries. The central banks of counties being the issuers of world’s reserve currency (euro area countries, USA, UK) and central banks of other countries (Denmark, Norway, Russia, Romania, Sweden and Southeast Asian countries) respond to this challenge by pursuing a loose monetary policy.
Owing to the fact that the foreign exchange earnings from non-residents exceed payments to non-residents, the dynamics of the foreign exchange market have remained stable and predictable since the start of the year. Against this backdrop, net demand for foreign exchange continues to decline. The average weighted exchange rate of hryvnia against the US dollar on cashless transactions increased from UAH 8.0284 per USD 1 to UAH 8.0088 per USD 1, whereas that on cash transactions on sale of the US dollar went up from UAH 8.0660 per USD 1 to UAH 8.0328 per USD 1.
After discussing the macroeconomic and monetary developments, the meeting participants drew the conclusion that it would be prudent to maintain the current stance of monetary policy, which makes it possible to provide some impetus for economic growth while keeping prices under control.
The meeting participants also discussed the risks that could potentially have an adverse impact on current macroeconomic and monetary trends. The major risks are concentrated around uncertainty over the development of European markets. In view of the above, Governor of the National Bank of Ukraine Sergiy Arbuzov drew attention of the meeting participants to the urgent need to attract domestic resources to fund the economic development projects by creating conditions that would encourage households to purchase government T-bills.
The Governor of the National Bank of Ukraine said that the Ministry of Finance of Ukraine under the auspices of the National Bank of Ukraine had recently expanded the set of instruments used by the government for domestic borrowing. In addition to traditional T-bills already available, instruments indexed to changes in the exchange rate of hryvnia against the US dollar as well foreign currency-denominated government T-bills have been introduced. As these financial instruments are high-yield and low-risk, their introduction offers an alternative way of investing household funds.
The meeting participants believe the one of the main reasons why a small volume of government T-bills is purchased by households is low awareness of the benefits of investing funds in these financial instruments. In view of the above, Sergiy Arbuzov instructed the NBU structural subdivisions in cooperation with the Ministry of Finance to raise the public awareness on this issue and provide methodological support on management issues to banks rendering the banking services to citizens willing to invest their funds in government T-bills.
Apart from that, the Governor of the National Bank of Ukraine focused his attention on the importance of the mortgage lending development. It will not only facilitate the achievement of price stability in the consumer market (as household funds would be diverted for the purposes of mortgage investment), but will also promote economic growth owing to an increase in construction output and output of construction-related industries. In this respect, Sergiy Arbuzov informed the meeting participants about an agreement in principle reached between the National bank of Ukraine and the Ministry of Finance. Under this agreement, when the budget for the current year is revised, a sufficient amount of funds will be earmarked to compensate borrowers for some interest rates on mortgage loans.