On 17 October 2016, the National Bank of Ukraine held a workshop on “Practical Aspects of Formulation and Implementation of the NBU’s Monetary Policy” arranged by the central bank for heads of treasury departments of the largest banks and financial market analysts. NBU representatives at the workshop included NBU Deputy Governor Mr Dmytro Sologub, Director of the Monetary Policy and Economic Analysis Department Mr Sergiy Nikolaychuk, and Director of the Open Market Operations Department Mr Sergiy Ponomarenko. The workshop was attended by over 30 representatives of the banking and expert community.

Mr Nikolaychuk delivered a speech on the topic “The NBU’s Monetary Policy Under an Inflation Targeting Framework: Objectives and Factors Driving Monetary Policy Decisions. In particular, Mr Nikolaychuk explained the reasons behind the NBU’s decision to announce a shift to inflation targeting and set a medium-term inflation target of 5% by the end of 2019. Ukraine’s inflation target is higher than that of developed countries (about 2%) as our country has had a long history of high and unstable inflation, as well as high inflation expectations of households and other economic agents. Furthermore, Ukraine’s economy is more vulnerable to shocks that have the potential to trigger turbulence in the domestic market.

Much of his speech was devoted to explaining the reasoning behind interest rate changes and the use of foreign exchange interventions in 2015-2016. “The actions taken by the NBU in the money and FX market were aimed at bringing inflation down to the pre-announced inflation targets of 12% by the end of 2016 and 8% by the end of 2017,” said Mr Nikolaychuk. “This being said, the pace of monetary policy easing depended on external and internal shocks experienced by the country this year.”

In addition, Mr Nikolaychuk took stock of the impact and effectiveness of changes in the NBU’s monetary policy operational framework that was redesigned in the spring of 2016. Mr Nikolaychuk said that the first element of the monetary policy transmission mechanism currently works in line with international best practices. By changing the key policy rate, the NBU effectively steers short-term interbank market interest rates that are allowed to fluctuate within a fixed corridor. The predictability and transparency of operations conducted for the purpose of steering interest rates on short-term financial resources paves the way for enhancing the efficiency of other channels of monetary policy transmission. Over the past year, the NBU has significantly strengthened the role of the key policy rate in influencing other interest rates, including rates on domestic sovereign bonds, loans, and deposits. All this has enhanced the monetary policy's ability to influence inflation.

In his turn, Mr Ponomarenko encouraged workshop participants to join a discussion on “The Set of Monetary Policy Instruments Used by the NBU in the Money and FX Markets: Recent Changes and Near-Term Plans." “We have developed a roadmap for improving operations of the interbank FX market. We have already implemented some of the measures envisaged by the roadmap. Today, I would like to discuss further measures with market participants,” said Mr Ponomarenko.

First, the NBU has streamlined a methodology for calculating the official exchange rate. In particular, the central bank has begun setting the official hryvnia exchange rate only on the basis of interbank agreements (between banks and the NBU), excluding agreements between banks and clients. At the same time, the NBU plans to discontinue the practice of registering agreements in the System for Confirmation of Deals in the interbank FX market of Ukraine (Val_Kli system), where information about all interbank agreements is recorded. Going forward, the NBU will retrieve information about these agreements from statistical reports submitted by banks.

Second, the NBU plans to shift away from using the Val_Kli system and the System for the submission of information about interbank hryvnia loan purchase and sale agreements (the CredInfo2 system). Instead, the NBU intends to switch to trading information systems (TIS) operated by Bloomberg and Reuters. During the transition period, banks will be able to register interbank agreements either through the Val_Kli system or the CredInfo2 system, as is the case now, or one of the TIS systems.

Third, in accordance with the recently approved NBU Foreign Exchange Market Intervention Strategy, the central bank intends to launch a new type of foreign exchange market intervention in the form of a request for best quotation. An FX auction is the most appropriate type of currency intervention for the purpose of accumulating international reserve, whereas a currency intervention in the form of a request for best quotation is the most efficient tool to smooth excessive FX market volatility. This new type of currency intervention will enable the NBU to promptly respond to changes in FX market conditions.

Fourth, the NBU will streamline foreign exchange market intervention techniques, meaning that the central bank will shift away from the practice of conducting currency interventions through the Val_Kli and CredInfo2 systems. Instead, the central bank will perform currency interventions through TIS systems operated by Bloomberg and Reuters. Using these systems enables the central banks to conduct interventions in a speedy and efficient manner. This is a widespread practice in developed countries. At the initial stage, FX auctions and currency intervention in the form of a request for best quotation will be conducted through TIS systems. Going forward, this practice will extend to the other two types of currency interventions (interventions at a single rate and targeted interventions).

Fifth, the workshop participants explored the possibility of establishing an institution of market-makers. If an agreement is reached between the NBU and market participants on this initiative, those banks that will become market-makers will be granted an exclusive right to participate in the NBU’s currency interventions. Furthermore, these banks will be allowed to perform FX operations under more liberal rules. However, these banks will be required to support market liquidity. Market-makers will be selected among banks based on open and transparent criteria.

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.