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Address by NBU Governor Kyrylo Shevchenko on NBU Board’s Monetary Policy Decision

Address by NBU Governor Kyrylo Shevchenko on NBU Board’s Monetary Policy Decision

Dear colleagues, I would like to inform you that the NBU Board has decided to postpone its key policy rate decision. The key policy rate will therefore stay unchanged at 10%.

We remain committed to pursuing our inflation-targeting regime. However, now that the forced administrative restrictions are in place, market-based monetary instruments such as the key policy rate no longer play a significant role in the operation of the monetary and FX markets.

What will the NBU’s monetary policy stance be going forward?

When economic conditions go back to normal, we will resume regular NBU Board meetings on monetary issues and continue to publish the Inflation Report.

The NBU will use the key policy rate and other monetary instruments to control inflation expectations and pursue the inflation target when monetary transmission channels go back into operation and it becomes possible to calculate, with reasonable probability, the impact of monetary decisions over the policy horizon.

After Ukraine is freed from Russian invaders and the economy is back to operating on market-driven principles, the NBU will return to its regular inflation-targeting regime with a floating exchange rate.

We also expect that the business-as-usual functioning of the FX market will be restored as soon as possible, and the FX restrictions will be canceled to pre-war levels. This may take several stages.

What are current banking system conditions in Ukraine?

The banking system remains stable and liquid even as martial law continues. Funds in retail clients’ accounts with the largest banks increased from the start of the war to 28 February, in part due to the disbursement of wages. Deposits outflows are restrained by the accessibility of cashless transactions and the limited operation of banks in some regions.

In addition, banks have a cushion of high-quality liquid assets that is sufficient to maintain all cashless payments and retail deposit repayments, even under current difficult conditions.

An additional boost for banks is the traditional secured refinancing and blank refinancing, provided for up to one year, that was introduced by the NBU. When needed, the NBU also supplies cash to banks without limitations.

At the same time, to continue to maintain a proper liquidity level of the banking system, the NBU Board has decided to:

  • suspend tenders to issue 14-day certificates of deposit
  • keep conducting tenders to refinance banks, including by making blank loans
  • cancel the decision to raise the required provisioning ratios that was made in early February

The NBU is taking every step necessary to ensure uninterrupted cash and cashless payments and support the continuous functioning of Ukraine’s banking system under martial law. At the same time, the NBU calls on the Ukrainian public to choose cashless payments over cash when purchasing goods, and has urged operators of retail trade networks and fueling stations not to reject cashless payments.

What is the current situation in the FX market?

Since 24 February, the foreign exchange market has been operating in restricted mode. The official exchange rate has been fixed, and a number of temporary FX restrictions have been introduced. In addition, the NBU has banned most international FX payments. The ban does not apply to making settlements and withdrawing cash using payment cards abroad.

Such necessary restrictions aim to ensure the reliable and stable operation of Ukraine’s financial system and facilitate the fullest support for the Armed Forces of Ukraine. These measures are also important for the smooth operation of critical infrastructure.

After the economic situation normalizes, the FX market will return to full operation as soon as possible.

What is the state of government finances right now?

The state financial system is functioning without problems. Government payments are made without limitations in accordance with the special period law. The liquidity buffer is sufficient for financing expenditures and repaying liabilities.

First, many Ukrainian companies continued to pay taxes to the state budget, and some of them even paid taxes in advance.

Second, the NBU urgently transferred a part of its distributable profit, almost UAH 19 billion, to the State Budget of Ukraine in order to provide the financing needed to maintain the operation of the state in times of martial law.

Third, international organizations and partner countries undertook to allocate large amounts of financing to reinforce Ukraine’s defense potential, support its economy, and address humanitarian issues. The total pledged international financial, technical, and humanitarian support stands at the equivalent of more than USD 15 billion, we estimate. That includes over USD 5 billion in funds that will go directly towards the state budget.

Funds on NBU accounts raised from organizations and individuals, both from Ukraine and other countries, are an additional source of financing for the needs of the Ukrainian Army. Specifically, as of 2 February 2022, an equivalent of more than UAH 6 billion has been transferred to the special account the NBU opened to support the Armed Forces of Ukraine.  The NBU has allocated UAH 1.6 billion of these funds for the needs of the Military.

Moreover, on 1 March, the Ministry of Finance of Ukraine issued military domestic government debt securities, which allowed it to raise UAH 8.1 billion for the state budget.

Ukraine feels the tremendous support of the international community.

We are grateful. We will never forget this.

I could end this speech with words of gratitude, but we must remember that the war in Ukraine rages on and that we must make every effort to defend our country!

To this end, the NBU has called on the international payment systems Visa and Mastercard to stop servicing payment cards issued by the banks based in the Russian Federation.

We have also asked G7 ambassadors and heads of several central banks, European banks that supply cash foreign exchange, and representatives of the international money transfer operator Western Union to cease deliveries of cash foreign currency to Russian and Belarussian banks.

In addition, the NBU has appealed to the International Monetary Fund and G7 countries to limit the participation of the Russian Federation and Belarus in the IMF and to block their use of the recent SDR allocation, as these funds can and will be used to finance the military aggression against Ukraine.

The NBU has also called on Bank for International Settlements to terminate membership of the Russian central bank.

These requests have already been partially met, but as cities and towns continue to come under heavy shelling and our democratic independent country remains under assault, these measures are not enough.

Dear colleagues, I urge you to join the push to counteract Russia’s aggression on the financial front! We need your support today more than ever before! We stand united, and we will win!

Glory to Ukraine!

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