On 15 April, the NBU Council adopted its Monetary Policy Guidelines for the Duration of Martial Law (hereinafter the Monetary Policy Guidelines), which will apply until the economy and financial system are back to normal. The document has been published today on the NBU’s official website.
Under the Monetary Policy Guidelines:
The NBU has committed to resume the pursuit of its inflation targeting regime with a floating exchange rate as the Ukrainian economy and financial system return to their normal mode of operation.
To maintain financial stability in Ukraine, the NBU was forced to fix the exchange rate and impose a number of administrative restrictions, including those on FX transactions and capital movements. Amid these restrictions and elevated uncertainty, market-driven instruments are having only a limited impact on the functioning of the money market and the FX market. The NBU has therefore temporarily postponed its key policy rate decisions.
The NBU will continue to ease the FX and capital constraints and gradually go back to the floating exchange rate regime as the FX market regains its ability to self-balance. An important prerequisite for this is a significant increase in FX supply, in particular by exporters as they revive production and revitalize their logistical routes. The gradual retreat from the fixed exchange rate and the easing of restrictions will allow Ukraine to avoid an accumulation of significant macroeconomic imbalances.
When uncertainty clears and the effectiveness of monetary transmission channels increases, the NBU will be able to reinstitute its traditional inflation-targeting regime. The NBU will resume its forecast cycle and return to using the key policy rate as its main monetary instrument in order to reduce inflation to its 5% target and keep inflation expectations in check.
The NBU will use monetary financing to meet only critical expenditures of the government. The central bank will seek to abandon this instrument as soon as possible.
To ensure that Ukraine can firmly repel russia’s large-scale armed aggression, the NBU has been supporting Ukraine’s state budget. This has also ensured the uninterrupted funding of the public finance system.
The NBU has only provided limited amounts of funds so that the government can meet its critical expenditures. In so doing, the NBU has maintained full transparency by making every transaction public. This will prevent:
- an intensification of fiscal dominance and high inflation
- a weakening of confidence in the NBU and an unbalancing of expectations
- making it harder for Ukraine to pursue its European integration path and cooperate with international financial donors.
The NBU will strive to completely abandon the financing of the state budget deficit as soon as it can.
The NBU will continue to maintain its institutional, financial, and operational independence in order to properly pursue its mandate.
Specifically, the central bank will continue to independently determine the feasibility and scope of transactions to finance the state budget deficit. The NBU will also avoid introducing instruments that could weaken public trust in its monetary policy, unbalance expectations, and intensify fiscal dominance.
The NBU will continue to support the stable operation of the banking system.
The banking system has remained stable even as the war has raged on. This resilience is a result of coordinated actions by the regulator and Ukrainian banks. The central bank will continue to safeguard Ukraine’s financial stability and take every measure to shore it up.
However, once risks to the banking system’s liquidity subside, the NBU plans to gradually roll back the emergency measures it has deployed to sustain banks. On the one hand, this will help maintain financial stability. On the other hand, it will contribute to putting the economy back on track to its market-driven operation.
The NBU will continue to actively combat russia’s aggression on the financial front.
The central bank will make every effort to ramp up economic pressure on the aggressor state. To this end, the NBU will negotiate with international partners to have new financial sanctions imposed on russia. The NBU will call on them to completely suspend all cooperation with the aggressor country. Russia’s isolation from the global economy and financial system is an important precondition for thwarting its capability to finance its war of aggression against Ukraine.
The NBU will help resolve the problems faced by Ukrainian refugees.
The regulator will continue to support Ukrainian refugees abroad, in particular by enabling them to exchange cash hryvnias for the currencies of their host countries.
The NBU will firmly adhere to the principle of preventing any narrowing of the hryvnia’s use as Ukraine’s sole legal tender.
The NBU will promote the development of an effective market for virtual assets, in particular by building a system of transparent and clear government regulation. At the same time, the central bank will do all it can to avoid any narrowing of the hryvnia’s role in payments and prevent loopholes for noncompliance with current government regulation, supervision, and monitoring during transactions with virtual assets.
The NBU will work closely with the government to help it raise external financing and implement reforms in Ukraine.
International funding is needed to deal with the humanitarian crisis, rebuild the infrastructure destroyed by the russian invaders, and restore and transform the Ukrainian economy. The NBU, jointly with the government, will continue to make every effort to reform Ukraine’s economy and financial system and to do everything in its power to contribute to Ukraine’s pursuit of European integration. All of the efforts outlined above can ensure the rapid post-war recovery of the Ukrainian economy.