The NBU explained the record increase in the discount rate

The decision to raise the discount rate from 10% to 25% will help maintain a stable hryvnia exchange rate and protect the income and savings of citizens from depreciation, says the National Bank.

They recall that in April inflation in Ukraine accelerated to 16.4% in annual terms and by the end of the year it could exceed 20%.

The NBU also recalled that in 2015 inflation reached 60%, but in a few years it was reduced to 5%.

The central bank advises Ukrainians to put money in a bank deposit to protect their savings. The deposits are protected and in case of bank liquidation, the Fund for Guaranteeing the Deposits of Individuals will return the deposits for their funds. For the duration of martial law and three months after it, this is a 100% guarantee. After this period, the guaranteed amount on deposits will be UAH 600 thousand.

Ukrainians are also advised to buy government securities. The highest rate on previously issued hryvnia bonds was 11.5% per annum. Payments to them are 100% guaranteed by the state and serviced by the Ministry of Finance.

The NBU says that due to the increase in the discount rate, rates on government bonds should rise.

If rates on government bonds rise after the discount rate, they will be more attractive for savings and help Ukrainians protect their money from inflation, according to the central bank.

Also, after the decision of the NBU must raise rates on bank deposits.

“As a result, it is expected that citizens will have more opportunities to save on the hryvnia. This means that demand for currency and pressure on the exchange rate will decrease. Therefore, the NBU will be able to maintain exchange rate stability and slow down inflation, “the report said.

At the same time, the NBU does not expect a significant increase in interest rates on loans, because they are growing before. This is due to the fact that banks are at great risk of not repaying the debt during the war. Therefore, they try to issue loans only to reliable borrowers where they compete with each other. Such competition prevents the rise of interest rates on loans.

In addition, it was noted that the growth of interest on hryvnia deposits and government bonds will help reduce pressure on the exchange rate and curb inflation.

After achieving these goals, the NBU will begin to reduce the discount rate to stimulate the economy.

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.