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NBU to Gradually Phase Out Anti-crisis Monetary Measures

NBU to Gradually Phase Out Anti-crisis Monetary Measures

In line with the Monetary Policy Guidelines for 2021, the NBU will start to phase out its emergency measures to support banks, which the central bank implemented in response to the coronavirus crisis. In particular, this concerns long-term refinancing and interest rate swaps.

As expected, these instruments provided additional support to the banking system and lending during the most difficult period of the crisis and at the early stage of economic recovery. However, they become irrelevant as the economy returns to steady growth and the financial market stabilizes.

The NBU estimates that the banking system of Ukraine is highly liquid and ready to return to the guidelines in place before the coronavirus crisis. At the same time, the anti-crisis measures will be wound down in phases in order to minimize risks to the financial system and the economy and to better analyze how banks operate under the previous and the new conditions.

Thus, from 1 July 2021 and on, the maximum maturity of long-term refinancing loans will be reduced from five to three years. Auction volumes will also decrease: to UAH 5 billion from July, UAH 4 billion from August, and to UAH 3 billion from September. At the same time, starting on 1 July, the frequency of interest rate swap auctions will be reduced from two times per month to once per month, with the maximum maturity decreasing from five to three years.

Furthermore, the NBU will change the operational design of its monetary policy. Effective 1 July, the maturity of certificates of deposit will return to its pre-crisis level, being reduced from 7 to 14 days. This will encourage the development of the interbank lending market.

Given that there are no significant shocks to the financial markets, long-term refinancing and interest rate swaps will be fully phased out on 1 October 2021. In addition, in September the NBU will consider reducing the maturity of regular refinancing loans.

At the same time, the NBU will continue to closely monitor the pandemic and the economic situation, and will stand ready to deploy its anti-crisis measures again to support the banks, if required.

“The banking system has overcome the coronavirus crisis successfully,” said NBU Governor Kyrylo Shevchenko. “Nonconventional measures did their part during the crisis. However, these measures are no longer required under current economic conditions. At present, the well thought-out and timely phasing out of anti-crisis instruments will have no adverse impact on either the banks or the economy. Conversely, it will provide the NBU with more control over inflation processes.”

“The NBU’s anti-crisis instruments enabled the banks to not only overcome the crisis with confidence, but also invest in long-term projects during hard times,” said NBU Deputy Governor Yurii Heletii. “However, their continuous use by the NBU discourages the banks from attracting new depositors, while also adversely impacting the functioning of market mechanisms. That said, the NBU is still striving for the further development of interbank lending and swaps.”

Background information

In March 2020, the NBU launched long-term refinance loans for a term of up to five years to maintain financial stability and support the economy. By 17 June 2021, UAH 82.1 billion in such loans had been issued to banks.

In addition, in March the NBU changed the maturities of liquidity regulation instruments. The maturity of two-week certificates of deposit was decreased to one week, while that of short-term refinance loans was increased from 14 to 90 days.

In July 2020, the NBU introduced interest rate swaps, with a view to boosting long-term lending by banks. Overall, by June 17 2021, the NBU had held 19 such auctions, entering into agreements with banks worth a total of UAH 18.4 billion.

 

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