In order to revive lending, the NBU has been stepping up efforts to introduce a new financial instrument – interest rate swaps with banks – in H2 2020.
To that end, the NBU has expanded the scope of its objectives as defined by the Regulation on Fundamentals of Interest Rate Policies of the National Bank of Ukraine. One of these objectives is now to enhance the performance of the secondary links of the interest rate channel of the monetary policy transmission mechanism. The NBU will meet this objective by setting interest rates for its transactions in the financial market, including interest rate swap transactions.
The introduction of the new financial instrument aims to achieve several goals at once.
First, the use of interest rate swaps with the banks will enhance the impact of the NBU’s monetary policy on interest rates in the banking system. The banks will receive an effective tool for hedging interest rate risks and will have an additional incentive to bring their interest rate policies into line with changes to the NBU’s key policy rate, which under the NBU’s baseline macroeconomic scenario should decline to 7% by the end of this year.
Second, the NBU’s participation may trigger the launch of an interest rate swap market, enabling the banks to mitigate interest rate risks. This, in turn, will help to stimulate loans to both businesses and households, including long-term loans to finance business development, mortgages, and more.
The procedure for setting interest rates for interest rate swap transactions, as well as the terms and conditions of these transactions between the NBU and the banks in the interbank market, will be governed by separate regulations, policies, and procedures of the NBU. Work to adopt this regulatory framework will be brought to its conclusion in the months ahead.
Said amendments to the fundamentals of interest rate policies were approved by NBU Board Resolution No. 20 On Amendments to Certain Regulatory Documents of the National Bank of Ukraine, dated 18 February 2020. These changes go into effect on 20 February 2020.
An interest rate swap is a derivative financial instrument in the form of an agreement through which two counterparties agree to exchange one stream of future interest payments for another, based on a specified principal amount. In most cases, interest rate swaps include the exchange of a fixed interest rate for a floating rate.