The National Bank of Ukraine (NBU) pursues an approach to monetary policy that is based on modern monetary policy instruments:
Operational Objective of Monetary Policy
Operationally, the NBU’s monetary policy aims to maintain hryvnia interbank rates close to the key policy rate within the range of interest rates on standing facilities.
The Ukrainian Index of Interbank Rates (UIIR) for overnight loans and deposits in the domestic currency is the indicator of hryvnia interbank interest rates for the purposes of the interest rate policy.
The Key Policy Rate as the Main Monetary Policy Instrument
The key policy rate is the key rate of the NBU’s interest rate policy. The NBU applies this rate to operations that have the largest impact on the cost of money in the interbank market. That helps the central bank maintain market rates at a level close to the key policy rate, and thus meet its operational objective.
Currently, tenders to offer 14-day certificates of deposit and tenders to provide 14-day refinancing are the main operations. The NBU alternates its main operations by holding refinancing tenders and placing certificates of deposit (schedules) every other Friday.
Interest Rate Corridor for Standing Facilities
Standing facilities are overnight loans or certificates of deposit offered by the NBU to banks. Banks have day-to-day unrestricted access to these monetary policy instruments.
Interest rates on standing facilities determine the corridor of the NBU’s interest rates: the key policy rate plus 1 pp for refinancing loans and the key policy rate minus 1 pp for certificates of deposit. The corridor limits fluctuations of interest rates around the key policy rate. In a properly functioning banking system, banks have no reason to conduct transactions in the interbank market outside of the set corridor.
FX Market Interventions
FX market interventions are an additional instrument available to the NBU.
The FX interventions aim to:
- accumulate international reserves
- smooth out excess exchange rate volatility
- support the transmission of the key policy rate.
Since the NBU follows a flexible exchange rate regime, FX interventions are not used to ensure a specific level for the exchange rate.
The specifics of FX interventions in an inflation targeting regime are outlined in the Foreign Exchange Intervention Strategy of the National Bank of Ukraine for 2016–2020.
In order to meet its objectives, the NBU can apply other instruments, such as:
- required reserves
- repo transactions
- purchase and sale of government securities
- swap transactions.