NBU Maintains Constant Dialogue with Businesses

On 28 October 2022, the NBU hosted the online meeting The NBU’s Monetary and Exchange Rate Policy and Efforts to Maintain Financial Stability in Wartime with the heads of Ukrainian businesses who participate in the central bank’s business outlook surveys.

The meeting aimed to inform business representatives about the regulator’s key actions during the war and receive interactive feedback in the form of a Q&A session on problems that concern businesses and take a constructive dialogue to resolve.

“We understand that businesses need to communicate with the regulator, and so we try to stay as transparent as possible and keep in constant touch with stakeholders. Thank you for holding the economic frontlines and participating in the polls in this time of hardship. It is important that we understand what is happening to businesses. Information from you is like a breath of fresh air amid a lack of sufficient statistical data,” NBU Deputy Governor Sergiy Nikolaychuk emphasized in his welcome speech. 

The event convened representatives of 90 companies from almost all sectors from all over Ukraine. Yurii Polovniov, Director of the Statistics and Reporting Department, Volodymyr Lepushynskyi, Director of the Monetary Policy and Economic Analysis Department, and experts from the Open Market Operations Department and the Financial Stability Department participated on behalf of the NBU.

The meeting covered a wide range of issues in three key areas:

Currency regulation and exchange rate policy in wartime and post-victory

Decisions to regulate the FX market while under martial law are intended to strike a balance between promoting business activity and preventing unproductive capital outflows.

Fixing the exchange rate has made it possible to maintain macroeconomic stability and controllability of price conditions. Currency restrictions have ensured that the critical needs of the economy are met without causing significant damage to the FX market.

All implemented measures in the FX market are constantly calibrated to market conditions to facilitate the conduct of business and meet the vital needs of the population.

The NBU does not currently see the need for an additional exchange rate adjustment. At the same time, there are currently no prerequisites for returning to a floating exchange rate.

Ukraine’s and global macroeconomic conditions, NBU’s monetary policy as war grinds on

According to the NBU’s forecast, inflation will be about 30% this year, and Ukraine’s GDP will plunge by 31.5%, primarily due to the fallout from the full-scale war. At the same time, inflation will decelerate as soon as next year as the economy continues to adjust to wartime conditions amid a decrease in global inflation and a tight monetary policy. The expected reduction in security risks, from mid-2023, will be a key driver of economic recovery in the years ahead.

To preserve macrofinancial stability while following global best practices, the NBU fixed the exchange rate and started to finance the budget deficit at the outbreak of the full-scale war. However, monetary financing is carried out in limited volumes. On the one hand, this financing effort aims to support the smooth execution of budget expenditures, primarily those on defense. On the other hand, it is conducted in a way that mitigates the economic risks posed by the use of such an instrument.

In addition, in March and April 2022, the NBU postponed its key policy rate decision, allowing households and businesses to quickly adapt to the wartime reality. Meanwhile, the central bank has returned to the use of its key policy rate as businesses and households switch back to economic-incentives-driven decision-making and uncertainty declines to a level that allows the NBU to make macroeconomic forecasts. A significant key policy rate hike was necessary for interest rates on hryvnia instruments such as deposits to start rising and for businesses and households to have a tool that can protect their hryvnia savings from inflation.

A relatively tight monetary policy approach is necessary to reverse the inflationary trend. The NBU will therefore keep the key policy rate at a high level. Efforts to keep consumer prices dynamics in check, further reduce inflation, and improve expectations are precisely what ensure that interest rates on loans will decline going forward.

Banking sector trends: war’s impact and NBU’s response

The banking system is working smoothly, retaining its liquidity and operational efficiency, even as the full-scale war grinds on. One of the reasons behind this success is that at the breakout of russia’s full-blown aggression, the banks were sufficiently capitalized and had well-established operating activities and contingency plans.

The volume of bank funding, primarily in hryvnias, is rising. In response to the key policy rate hike and high inflation and depreciation expectations, the banks are gradually raising interest rates on deposits. Key lending channels in wartime are the public program Affordable Loans 5%–7%–9% and a portfolio-based program of public guarantees.

As a consequence of the full-scale war, the banks have incurred some operational-risk-related losses. At the same time, credit risk remains the main risk to the banking system. The net value of the loan portfolio continues to trend down. The NBU estimates that the performing loans portfolio stands to lose more than 20% of its value because of the war.

By postponing a number of regulatory requirements, the NBU has given the banks a chance to focus on the proper assessment and accounting of losses so that the actual standing and recovery prospects of the financial institutions can be better understood. When the economic situation stabilizes, the NBU plans to begin to assess the banks’ assets and capital in a manner that takes into account every existing risk. After the economy returns to sustainable growth, the NBU will reimpose its pre-war ratios and requirements and further harmonize its regulatory requirements with EU legislation.