The National Bank of Ukraine introduces changes into the operational design of its monetary policy effective 11 January 2019 in order to be more flexible in responding to changes in liquidity of the banking system of Ukraine.
The banking system’s liquidity surplus narrowed this year, as the economic growth pushed up cash needs of households and businesses and due to operations between the government and the NBU.
This trend may continue in 2019. As a result, the banking system may shift to liquidity shortage during the year. If that is the case, the banking system’s liquidity may be instable, swinging between surplus and shortage. Moreover, liquidity may be segmented, meaning distributed unevenly among banks. This explains the need to change the operational design in order to make it more flexible.
Based on these conditions, the new design will mainly rely on tenders to both offer certificates of deposit with maturity of 14 days and provide refinancing for the same term.
Therefore, rates on two-week certificates of deposit and two-week refinancing loans will equal the NBU key policy rate.
There will be no volume limits for refinancing tenders and tenders to sell certificates of deposit. This will raise the importance of the key policy rate as the benchmark for interbank loan rates.
The interest rate corridor for overnight standing facilities will remain unchanged: the key policy rate plus 2 pp for refinancing loans and the key policy rate minus 2 pp for certificates of deposit. At the same time, the NBU will discontinue refinancing tenders that were used to provide liquidity support for a period of 90 days. Banks currently have minor interest in such tenders, as they can resort to rollovers.
The NBU will also change the schedule for holding its liquidity management operations. The NBU will stop holding weekly refinancing tenders and placing certificates of deposit twice a weeks. The central bank will alternate its main operations, which will be conducted every Friday, by holding refinancing tenders and placing certificates of deposit every other week. The reduction in the frequency of scheduled tenders is expected to foster interbank lending, by encouraging banks to lend to each other. As before, the NBU will hold unscheduled tenders if it deems that money market conditions and the banking system’s liquidity require such tenders.
Changes to the operational design of the NBU’s monetary policy are expected to help the central bank meet its operational target more effectively, even when liquidity conditions are unstable. More specifically, the operational goal is to maintain hryvnia interbank rates at a level close to the key policy rate, within the interest rate corridor formed by the interest rates on the standing facilities.
As a result, the new operational design should deliver the right conditions for making the transmission mechanism more effective, and achieving the strategic goal of reducing inflation to 5% +/-1 pp in the medium term. The new streamlined design will prevent changes in liquidity conditions from having any significant impact on bank lending and economic growth.