Dear colleagues,
We send you our regards from Warsaw, where my colleagues and I are staying now after the end of the IMF mission. We are going home after the briefing. We have been warmly welcomed by colleagues from the Embassy of Ukraine in Poland, so we can start our work.
Today the Board of the National Bank of Ukraine decided to keep the key policy rate at 25% per annum and take a number of additional measures to spur competition among the banks for retail term deposits.
Such steps will contribute to the attractiveness of hryvnia savings improving further and to supporting stability on the FX market, and will create preconditions for FX restrictions to be eased. This will help protect households’ savings from inflation and will secure a decline in the pressure on prices.
Inflation in Ukraine decelerated for the second month in a row, reaching 24.9% yoy in February.
The decline in inflation was facilitated by an increase in supply of foods and fuel, a fast-paced recovery in the energy system after russia’s attacks, and weaker consumer demand.
Fixed official exchange rate of the hryvnia and frozen utility tariffs were also the factors restraining the rise in consumer prices.
The complete cessation of monetary financing of the budget from the start of the year also had a favorable effect.
Inflation will continue to slow, including due to the NBU’s measures
The attractiveness of hryvnia term deposits improving further and lower pressures in the cash FX market will prompt depositors to increase their savings in the domestic currency.
This will make the FX market more resilient, protect international reserves, and support an improvement in exchange rate and inflation expectations going forward.
A slowdown in global inflation and the high base effect will also contribute to a drop in the inflationary pressure.
Relatively moderate consumer demand will curb price growth.
At the same time, the duration and the intensity of hostilities and further destruction of critical infrastructure remain important risks to the inflation dynamics.
Relevant risks also include the risks of additional budgetary needs and substantial quasi-fiscal deficits in the energy sector; the risks of complicated or blocked operation of the grain corridor; and the risks of early monetary policy easing by leading central banks in response to rising threats to financial stability.
Regular inflows of international financing are an important precondition for macrofinancial stability
Taking into account potential inflows of financing from international partners, including the IMF, and further revival of the domestic debt market, budget needs will be fully covered in 2023 without resorting to monetary financing of the budget deficit.
In turn, the NBU will be able to continue maintaining sufficiently high international reserves and balance the FX market.
With a view to bringing down inflation further, protecting hryvnia savings from being eroded away by inflation, and maintaining a stable exchange rate, the NBU Board decided to keep the key policy rate at 25%, and to introduce additional measures.
Starting from 7 April 2023, the NBU will adjust the operational design of its monetary policy.
First, it will introduce three-month certificates of deposit with a fixed rate that equals the key policy rate.
The banks’ ability to invest in these CDs will depend on the volumes of their hryvnia household deposits with initial maturities from three months, as well as on how successful the banks are in increasing their volumes of these deposits.
The final parameters of these instruments will be approved in early April after being discussed with the banks.
Second, the interest rate on overnight certificates of deposit will be cut, to 20%.
What is more, starting from 11 May 2023, preferential required reserve ratios for time household deposits will only apply to deposits with initial maturities of three months or over.
The above measures will encourage the banks to raise hryvnia time household deposits, which will decrease risks to the FX market and international reserves as FX restrictions are eased.
The NBU will continue to deliver the monetary conditions required for a steady drop in inflation, improving inflation expectations, and supporting exchange rate stability.
If required, the NBU will adjust monetary conditions, taking into account the balance of risks and any changes in the macroeconomic forecast, in order to safeguard price and exchange rate stability, while also laying the foundations for a gradual easing in FX restrictions.
When the financial system and the economy start functioning normally, the NBU will gradually return to the operation design of monetary policy which was in place before the full-scale invasion.
Thank you for your attention!
Glory to Ukraine!