Monetary Policy

The priority of monetary policy is to achieve and maintain price stability. With low and stable inflation, the incomes and savings of Ukrainians are protected from losing value, and entrepreneurs have the opportunity to plan long-term investments in the domestic economy, which contributes to job creation. To attain price stability, the NBU in 2015-2021 used conventional inflation targeting (IT) with a floating exchange rate and the key policy rate as the main monetary instrument. During the full-scale war, however, the NBU first switched to an exchange-rate peg and then to flexible IT, whereby the central bank ensures that inflation is brought to its 5% target within a policy horizon of three years at most, by applying a consistent combination of interest-rate and exchange-rate policy instruments, FX restrictions, and other tools as necessary. After security risks abate and appropriate macroeconomic prerequisites are put in place, the NBU will return to conventional IT.

Does price stability mean no change in prices?

Price stability does not imply that prices do not change; it means that prices grow at a moderate pace.

No central bank seeks to achieve zero inflation. Inflation being close to zero poses the risk of deflation that is just as bad for the economy as high inflation.

In the majority of developed countries, price stability is achieved when inflation is low and stable, at a level of 1%–3%. Central banks in developing countries usually set higher medium-term inflation targets, which range between 4% and 8%. In Ukraine, the NBU has set the medium-term inflation target, as measured by the year-on-year CPI growth, at 5% ±1 pp.

Why doesn’t the NBU print enough money to finance the country’s needs?

Money is a special commodity, but, like all other commodities, it carries value only if limited in quantity. In case a central bank issues (or, as people sometimes say, “prints”) money to cover government spending, it increases the amount of money in circulation greatly. However, the total demand for goods and services grows faster than the economy’s capacity to produce them, which would imminently translate into higher inflation.

That is, using money issue to finance the country’s needs can lead to adverse effects for the economy and public welfare, due to:

inflationary processes
depreciation of the domestic currency against foreign currencies
an adverse long-term impact on economic growth.

For example, take Ukraine’s negative experience of the 1990s, when the NBU financed loans to some economic sectors and the large budget deficit. This made the macroeconomic situation in the country uncontrollable. In 1992–1994, inflation peaked at over 10,000%, and real GDP fell by 9.7% in 1992, 14.8% in 1993, and 22.8% in 1994. This resulted in a drastic decline in the living standards.

How does the NBU issue money?

The initial issue of money is always conducted in cashless form through banks only (as the NBU operates exclusively via banks). The NBU can issue money using three channels:

the credit channel, when banks take loans from the NBU providing government securities or foreign currency as collateral; the NBU credits these funds to the banks’ accounts
the currency channel, when banks sell foreign currency to the NBU, which credits hryvnia funds to their accounts in exchange
the stock exchange channel, when the NBU buys securities from banks and credits hryvnia funds to their accounts.

Issue of cash always derives from the noncash issue of money. A bank asks the NBU to debit its account and receives cash at the NBU’s cash desk. After that, the bank can distribute cash to its customers by debiting cash funds from their accounts. At the same time, the amount of money in the economy does not change: of cash hryvnia decrease, while hryvnia cash grows by the same amount.