A strong argument could be a further, stable and faster weakening of inflation, according to the National Bank.
The members of the Monetary Policy Committee of the National Bank expect relatively tight financial conditions to continue in the future, but most of them believe that due to the continued weakening of inflation, the reduction of the discount rate may begin as soon as earlier than expected by the macro forecast. This is stated in the results of the discussion of the members of the NBU Monetary Policy Committee on the level of the discount rate, published on Monday, March 27.
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Thus, the members of the Committee stated that inflation began to decline earlier and faster than expected.
“However, the high level of uncertainty due to the war slows down the economic recovery and leads to the development of still high inflation and expectations of devaluation. In addition, there are still risks of the termination of the grain corridor, as well as the pressure from a very high current account balance in the banking system,” – said the message.
The NBU also noted that the yield of Hryvnia instruments is gradually growing. However, the term deposit rates of the largest banks continue to be insufficiently attractive for depositors, due to the high level of current and expected inflation.
“Consequently, the panelists agreed that tight monetary conditions are needed to maintain exchange rate stability, reduce inflation and improve expectations, and for the sixth time in a row they unanimously supported maintaining the discount rate at 25%. ILC members also unanimously spoke in favor of changing the mechanism for calculating required reserves (OR), which would make it impossible for banks to manipulate quasi-terms depositors to avoid increased OR requirements and encourage them to raise depositors’ funds for a longer period,” the regulator added.
At the same time, the majority of participants in the discussion supported the optimization of the operation of the monetary policy design, in particular, the reduction of the rate on overnight certificates of deposit (DS) up to 20% and the introduction one three months. DS at a discount rate linked to the effectiveness of attracting hryvnia term deposits by banks.
This measure will increase incentives for banks to compete for depositors’ term deposits, will contribute to a faster growth in the attractiveness of hryvnia assets and reduce macro risks -financial stability, the NBU said.
The National Bank also emphasized that the members of the ILC expect relatively tight financial conditions to continue in the future, however, most of them believe that, due to the continued weakening of inflation, the reduction in the discount rate may start earlier than expected by the macro forecast. .
“Eight members of the ILC expressed the opinion that the NBU may move to lower the discount rate earlier than expected by the January macro forecast. A further, stable and faster than forecast slowdown in inflation may become a strong argument. Most of the participants in the discussion did not specify any date or the size of the likely steps to reduce the discount rate. They mentioned that it is necessary to wait for the updated macro forecast.
At the same time, two members of the ILC said that the NBU may start a cycle of lowering the discount rate in the fall. Another participant in the discussion did not exclude that the requirements for such a decision could be developed even earlier. He emphasized that, in addition to a faster decline in inflation, other necessary prerequisites are still being developed.
In particular, the pressure on the foreign exchange market is decreasing, and the prospects for maintaining international reserves at a relatively high level are improving, due to progress in negotiations with the IMF,” added the NBU.
At the same time, some ILC members urged not to rush to conclusions about changes in the discount rate forecast. According to one of them, future rate decisions should take into account the high level of uncertainty associated with the course of military events.
In addition, they are worried about the consequences of a possible development of a new financial crisis in the world after the bankruptcy of several large Western banks.
The NBU emphasized that the maintenance of a high discount rate from July 2022 is one of the measures that helped prevent deteriorating expectations and stabilize the situation in the foreign exchange market, despite the widespread war. The market expects a balanced policy from the regulator going forward.
According to another participant in the discussion, supported by the majority of ILC members, the trajectory of the discount rate should be consistent with the plan for easing administrative restrictions on the foreign exchange market, which the NBU is currently working on. Another member of the ILC noted that, given the current balance of risks, the need for further strengthening of monetary policy should not be abandoned.
It will be remembered that on March 16, the National Bank expectedly decided to keep the discount rate at 25% – inflation is slowing down faster than expected, but still high.
The discount rate is equal to the economic value of money. At this rate, the NBU provides funds to commercial banks, which, in turn, lend to individuals and legal entities. Thus, the discount rate affects the value of credit resources. An increase in the discount rate indicates an increase in the level of inflation and a decrease in the rate of economic growth in the country. The forecast of the National Bank assumes that the discount rate will remain at the level of 25% until the end of the first quarter of 2024.
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Source: korrespondent
I’m Liza Grey, an experienced news writer and author at the Buna Times. I specialize in writing about economic issues, with a focus on uncovering stories that have a positive impact on society. With over seven years of experience in the news industry, I am highly knowledgeable about current events and the ways in which they affect our daily lives.