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NBU Implements Announced Changes in Operational Design of Monetary Policy to Reinforce Macrofinancial Stability, Effective 7 April

NBU Implements Announced Changes in Operational Design of Monetary Policy to Reinforce Macrofinancial Stability, Effective 7 April

As previously announced, the NBU is updating the operational design of monetary policy, starting 7 April 2023, in order to strengthen the banks' market-based incentives for raising hryvnia retail term deposits and to reduce risks to the FX market and international reserves.

The changes will protect household savings from inflation-driven depreciation, ensure a further easing of price pressure, and help develop a culture of hryvnia-denominated term savings.

The NBU has identified the parameters of the new operational design of monetary policy

Changes to the operational design include:

  • cutting the overnight rate on certificates of deposit (CDs) to 20% from 23% per annum
  • introducing new limited three-month CDs with an interest rate fixed at the level of the key policy rate.

The banks’ ability to invest in such three-month CDs will depend on the volumes of their retail hryvnia deposit portfolios with initial maturities of at least three months, as well as on how successful the banks are in increasing their volumes of these deposits. The banks will be able to make requests to buy three-month CDs, both from the NBU and in the interbank market, within a dynamic limit made up of two parts:

  • The first part will equal 70% of the bank's portfolio of hryvnia retail deposits with initial maturity of at least three months that is available three business days prior to the purchase of three-month CDs.
  • The second part will equal a multiplier times the increase in the volume of such a portfolio of hryvnia retail deposits, starting 4 April 2023. The multiplier value will be 3.0.

To fine-tune the operational design, the NBU reserves the right to periodically review the share of the deposit portfolio and the multiplier used to calculate the maximum volume of purchases of three-month CDs by the banks. This will make it possible to ensure the necessary monetary conditions for a steady decline in inflation, an improvement of inflationary expectations, and the maintenance of FX market stability.

At the same time, the parameters of the operational design of monetary policy will be determined based on the need to maintain the banks' interest in competing for term deposits.

Efforts to update the operational design will help increase the attractiveness and maturity of hryvnia retail term deposits

The banks' ability to put part of their free liquidity into three-month CDs, depending on the dynamics of the retail term deposits portfolio, will encourage the banks to compete for depositors more actively, including by raising interest rates.

Part of the banks will find it profitable to take their work with depositors to a new level, to ramp up their marketing efforts, and to further increase interest rates on hryvnia term deposits. Another group of the banks will be forced to follow the market to maintain liquidity and retain clients, whose trust is always difficult and expensive to win back.

On the other hand, for the banks that choose to continue to channel their free liquidity only to overnight CDs, such transactions will generate lower returns than before, both due to changes in the operational design and because of the updated calculation of reserve requirements, from 11 May.

Monetary conditions in the interbank market will remain rather tight

The expansion of the lower bound of the interest rate corridor will be partly offset by transactions with three-month CDs that were previously unavailable. The volumes of the banks' transactions with three-month CDs, times the multiplier, will gradually grow as portfolios of hryvnia retail term deposits increase.

Transactions with three-month CDs will therefore have a significant impact on money market conditions and the banks' business behavior. Specifically, changes to the operational design will help jump-start the interbank market.

What is more, the adjustment of the operational design of monetary policy will gradually reinforce the key policy rate's impact on money market conditions and the business conduct of economic agents.

The new monetary design is a temporary measure to enhance the investment appeal of hryvnia assets

As the economy and financial markets normalize, the NBU expects to go back to the conventional operational design of monetary policy. In the traditional design, two-week CDs are placed at the key policy rate, the interest rate corridor for transactions to place overnight CDs and for refinancing transactions is symmetric around the key policy rate.

However, given the important role the gradual normalization of monetary policy plays in ensuring that hryvnia deposits become increasingly more attractive, transactions with three-month CDs at the key policy rate will continue until at least April 2024.

Changes to the operational design of monetary policy have been approved:

  • by NBU Board Resolution No. 45 On Amendments to NBU Board Resolution No. 22 dated 24 February 2022 dated 6 April 2023, which takes effect on 7 April 2023. This resolution, among other things, introduces transactions with three-month CDs and identifies their parameters.
  • by NBU Board Decision No. 130–D On Setting the Parameters for Calculating the Maximum Amount of a Bank's Purchase of Limited Certificates of Deposit of the National Bank of Ukraine dated 6 April 2023 and effective 7 April 2023. This decision determines the multiplier and the share of the existing retail hryvnia deposit portfolio with three months' initial maturity that are to be used in the calculation of the maximum limit on the banks' investments in three-month CDs.
  • NBU Board Decision No. 131–D On Setting the Interest Rates for Permanent-Access Instruments of the National Bank of Ukraine dated 6 April 2023 and effective 7 April 2023. This decision establishes the bounds of the interest rate corridor for transactions with overnight CDs and bank-refinancing transactions.
For reference

In 2023, the NBU implemented a range of measures to enhance the monetary transmission, boost the domestic debt market, and mitigate risks to macrofinancial stability. Raising reserve requirements was one of such measures. In January–March 2023, the NBU increased the reserve requirement ratios for demand deposits and current accounts by a total of 20 pp for retail clients and by 10 pp for legal entities. In addition, the NBU allowed the banks to cover part of reserve requirements with benchmark domestic government debt securities.

Thanks to the key policy rate remaining at 25% and additional measures taken by the NBU, interest rates on new retail term deposits in the hryvnia grew more rapidly. In February 2023, they were higher by 7.7 pp compared to June 2022 (when the key policy rate rose to 25%). Such an increase in interest rates was even slightly above the expected trajectory considering the elasticity estimated based on previous years’ data.

The banks that took the lead in raising their interest rates in recent months were able to improve the term structure of their deposits. At the same time, the largest banks, which are the main liquidity beneficiaries due to substantial budgetary spending, still have interest rates that are not attractive enough to depositors given the current and expected inflation. As a result, unprecedented volumes of households’ funds are being kept in current accounts, generating additional risks to macrofinancial stability.

To neutralize these risks, the NBU is taking additional steps to increase the banks’ competition for retail term deposits, including by making


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