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Discount rate raised to 9.5% per annum from 6.5%

Having analyzed the behavior of macroeconomic and monetary indicators in the January to April period, the Board of the National Bank of Ukraine pointed to the tense situation in Ukraine's money market resulting from the worsening of economic agents' market expectations amid social and political tensions.

Under complicated macroeconomic conditions, it poses risks to price stability, the maintenance whereof being a top priority for the National Bank of Ukraine in accordance with the applicable law. Inflation has been growing at a faster pace over the past few months. In particular, annual CPI inflation picked up to 3.4% in March versus 1.2% in February 2014. At the same time, there are risks of a further upward spiral in inflation as a result of a decline in the exchange rate of the hryvnia and the implementation of economic reforms announced by the Ukrainian Government.

In order to curb inflation and redress imbalances built up in the money market, the Board of the National Bank of Ukraine considers it necessary to take measures to raise the intrinsic value of the national monetary unit by enhancing efficiency of the interest rate pass-through. Coupled with other stabilisation measures taken by the National Bank of Ukraine, it will make deposits more attractive and have a positive impact on Ukraine's foreign exchange market conditions.

At the same time, the Board of the National Bank of Ukraine considers it expedient to mitigate the impact of changes in the interest rate policy on the cost of the mechanism designed to provide immediate liquidity support to banks, which has recently been adopted by the National Bank of Ukraine, given the fact that presently its nominal level is within the bounds of market value of resources.

In view of the above, on April 14, 2014, the Board of the National Bank of Ukraine passed Resolution No. 212, which envisage the following:

Discount rate should be set at 9.5% (effective from April 15, 2014). The discount rate was last changed on August 13, 2013 when it was set at 6.5% per annum;

the interest rate on refinancing loans granted by the central bank through the mechanism designed to provide immediate liquidity support to banks should be set at the level twice the value of the discount rate. It was previously set at the level three times the value of the discount rate.

Commenting on the Resolution passed by the National Bank of Ukraine Board, Director of General Department of Monetary Policy Olena Shcherbakova expressed confidence that, coupled with other measures taken by the regulator, it would help stabilize the situation in the market. “Ukraine has wide experience of handling the situation in the money market in challenging conditions. This indicates that under these conditions the most appropriate option is to achieve two goals. The first goal is to provide the maximum liquidity support to banks so that they are able to meet their obligations. The second goal is to raise the value of the monetary unit, among other things, through the interest rate pass-through, which keeps the speculative demand for resources down and helps revive banks' funding base," noted Ms Olena Shcherbakova.

According to her, this plan of action will help ensure the normal operation of the banking system, and maintain price stability. “The funds that households have withdrawn from bank accounts could put upward pressure on consumer prices,” added Ms Olena Shcherbakova.

For reference

The discount rate is the base rate for the National Bank of Ukraine’s other rates and the rate at which resources are offered through the liquidity-providing tenders.

The discount rate serves as a benchmark for measuring the price of money. By changing the discount rate the National Bank of Ukraine sends a signal to market participants about the stance of the monetary policy and signals that it is resolute in its efforts to exercise its main function in ensuring the hryvnia stability.

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