The National Bank raised the discount rate to a record high

In the first two months of the war, the regulator kept the discount rate unchanged, and at the beginning of the fourth month raised it to 25%.

The National Bank raised the discount rate by 1,500 basis points – up 25% per annum from the current 10% – the maximum since 2015, according to the NBU’s website on Thursday, June 2nd.

“The Board of the National Bank decided to raise the discount rate to 25% per annum. The purpose of this decisive step, among other measures, is to protect the hryvnia income and savings of citizens, increase being attractive hryvnia assets, reduce pressure on the foreign exchange market and, as a result, strengthen the ability of the National Bank to ensure exchange rate stability and contain inflationary processes during the war, “the report said .

The NBU believes that such an increase in the discount rate will stimulate interest on hryvnia assets, reduce pressure on international reserves and affect inflation.

A slight increase in the basic rate, according to the NBU, will not have a significant impact on the financial system and economy due to the limited effectiveness of the mechanism of transmission of money during the war, as well as the formation of expectations for further increase in the discount rate and, accordingly, the wait-and-see position of depositors and less interest in hryvnia assets.

In addition, to revive interest on hryvnia assets, their profitability must exceed the expected inflation rates, says the NBU.

The central bank recalled that the avoidance of making discount rate decisions at the beginning of the Russian invasion was justified in the context of a significant psychological shock caused by the war, however, the gradual adaptation of Ukrainian economy and the changing psychological shock to the economic logic of business decision-making and the population requires a change in monetary policy strategies.

“Currently, in the absence of proper compensation for the maintenance of hryvnia assets, the threat of dollarization of the economy and the corresponding loss of resources of the financial system has intensified,” the message said.

It is pointed out that despite the adequate level of Ukraine’s international reserves, thanks to receipts from international partners, risks to macro-financial stability have increased in the medium term, and in the absence of a significant increase in profitability of hryvnia assets. , the rapid depletion of international reserves and the accumulation of economic imbalances will continue.

The NBU expects that the government and banks will adequately respond to the change in the discount rate by corresponding increase in rates on government bonds and deposits, which will increase the attractiveness of hryvnia assets, which will protect savings and income of citizens from inflation.

Recall, on January 20, the Board of the National Bank decided to raise the discount rate from 9% to 10% per annum and announced a large possibility of its further increase.

But in the first two months of the war, the discount rate did not change.

The discount rate is equal to the value of money in the economy. 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.

The increase in the discount rate indicates an increase in inflation and a collapse of economic growth in the country.

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