The National Bank of Ukraine (NBU) has clarified the operational objective of its interest rate policy aiming to enhance transparency of its monetary policy.
The operational objective of the NBU’s monetary policy is to maintain hryvnia interbank rates close to the key policy rate within the range of interest rates on standing facilities. For the purposes of the interest rate policy, an indicator for the level of hryvnia interbank interest rates will be the Ukrainian Index of Interbank Rates (UIIR) for overnight loans and deposits in the domestic currency.
Whereas the inflation decrease to 5% in the medium term is the monetary policy objective, the objective of the monetary policy operations is to maintain the UIIR value close to the key policy rate (18% at present) and within the range of interest rates on standing facilities, that is, on overnight loans (20% at present) and overnight certificates of deposit (16% at present).
The NBU has chosen the UIIR as a benchmark because it is calculated daily under clear rules on the basis of actual deals between commercial banks. The reliability of this calculation is confirmed by the NBU that manages the UIIR and updates it on the NBU’s official website.
The relevant amendments regarding the operational objective of the interest rate policy were approved by NBU Board Resolution No. 117 On Amendments to Regulation on the Principles of the Interest Rate Policy of the National Bank of Ukraine dated 5 November 2018.
The NBU implements its interest rate policy by regulating the demand and supply of money through changes of the interest rates on its operations with a view to influence the interest rates of money market participants and profitability of financial operations.
By changing the key policy rate of the monetary policy, the NBU exerts influence over the short-term interest rates in the interbank money market, which cause changes in the interest rates on other financial assets (in particular, government securities) and banks’ interest rates on loans and deposits. These rates have a direct impact on the consumption and investment volumes of both households and enterprises and, therefore, on inflation.