The head of the National Bank of Ukraine Kyrylo Shevchenko said that inflation in Ukraine will exceed 20% by the end of 2022. In connection with the acceleration of inflation, the discount rate was increased from 10% (it was frozen at this percentage after the Russian attack ) to 25% to minimize flow of hryvnia assets into foreign currency. A similar situation existed in 2015, when it made it possible to solve problematic economic aspects that arose in connection with the annexation of Crimea and Russia’s invasion of the Donetsk and Luhansk regions. This was a forced step to protect hryvnia income and savings, increase the attractiveness of hryvnia assets and reduce pressure on the foreign exchange market.
Using such a monetary policy tool as the discount rate, the national regulator can influence inflation. The higher the interest rate, the more expensive it is for banks, and as a result, for bank clients, loans and deposits. This leads to the fact that businesses and citizens accumulate cash instead of spending it on consumption. Accordingly, the demand for goods decreases, and inflation slows down. However, there is also a negative aspect. This is a reduction in lending, which, in turn, can lead to a slowdown in economic growth.
Former head of the National Bank of Ukraine Valery Gontareva positively assesses the work of the National Bank in these difficult times. A separate positive assessm
ent was given to the attraction of international aid, since currently the NBU has financed 50% of the budget, and we have already received grants and loans from international organizations for 50%.
At the same time, remittances by Ukrainians from abroad decreased by 10% compared to last year. And the drop in wages in the private sector averaged from 25 to 50%. According to surveys by the National Bank of Ukraine, such areas as the extractive industry and construction experienced the most problems .
The National Bank also cancels restrictions on setting the exchange rate at which banks sold cash currency. Previously, it could not deviate by more than 10% from the rate officially set by the regulator. The deputy head of the NBU, Yuriy Geletiy , noted that this will improve the working conditions of legal market entities. This step will promote competition and increase the liquidity of the legal segment, while reducing the volume of illegal transactions. He added that this will make the foreign exchange market more stable and help reduce the amplitude of exchange rate fluctuations in its cash segment.
The regulator tries to find a compromise where possible. In order to minimize the impact of currency restrictions on the IT sphere, which is the main resource for the future digital transformation of the economy, the National Bank, together with IT specialists, agreed to work out a compromise solution to minimize the consequences of the introduction of a multiple exchange rate, which will make it possible to preserve foreign currency revenues and taxes from the IT industry. switch to a floating rate. By the way, before the start of the war, the NBU planned to digitize the economy by introducing the e-hryvnia into circulation. The Ministry of Digital Transformation of Ukraine signed a memorandum with Stellar Development Foundation regarding mutual understanding and cooperation, within the framework of which they will work on the development of a strategy for the development of the virtual assets market in Ukraine. E-hryvnia is a cryptocurrency , but it is a so-called stablecoin , as it will be tied to the national currency at a rate of 1 to 1. Its issue will be initiated by the National Bank of Ukraine. The new virtual asset will reduce payment fees as it minimizes the cost of collecting and issuing money. There is an opinion that the e-hryvnia can act as an instrument of monetary policy. A pilot project for the use of e-hryvnia has already been launched . The National Bank of Ukraine says that this project involves the testing of electronic money by employees of the Diya state enterprise. Who knows, maybe the e-hryvnia will play a huge role in the period of post-war development of our state.
The regulator explains its innovations by the fact that, together with other measures, this will contribute to the protection of hryvnia incomes and savings of citizens, increase the attractiveness of hryvnia assets, reduce pressure on the foreign exchange market and, as a result, strengthen the National Bank’s ability to ensure exchange rate stability and curb inflationary processes during wartime.
Of course, time will tell whether these steps will be successful, but we can already make certain predictions.
A 2.5-fold increase in the discount rate will not be able to stop the rise in prices. The economy of our country has suffered huge losses, the chains of production and supply of goods have been disrupted or even broken, we are observing a shortage of fuel, a possible energy crisis. It is also not necessary to ignore the general uncertainty of consumers, which is connected with the course of hostilities. That is, prices will most likely rise, but not as much as they could rise if the discount rate were not raised.
Regarding loans and deposits, we can say that since February 24, we have observed the flow of hryvnia funds into foreign currency. This was due to the drop in the interest rate from 8.1% to 7.9% per annum. The increase in the NBU discount rate will allow banks to revise their rates on deposits and loans upwards, as banks will take refinancing loans from the NBU as a lender of last resort, where the rate is from 11% to 27% per annum.
With regard to the exchange rate of the national currency, it can be argued that an increase in the discount rate will help curb devaluation trends in the cash market, which will make it possible to save gold and foreign exchange reserves. If, again, we recall the year 2015, then the same actions with an increase in the rate to 30% contributed to the stabilization and subsequent recovery of the exchange rate of the national currency from over 30 to 22 hryvnias per dollar.
With regard to the sphere of the economy, the mentioned actions of the NBU should contribute to increasing the value of the credit resource. This can cause certain problems both in the functioning of the economy during the war and in post-war reconstruction, since it will be more difficult for businesses to borrow funds that could be spent on reconstruction or development.
At the same time, without such operational actions of the NBU, inflation would grow at a much faster rate. The issue of hryvnia to patch budget holes and support the solvency of banks would also not play into the hands of our economy. At the moment, we need to prepare for moderate inflation, a certain increase in prices, and believe in the Armed Forces of Ukraine, which are now protecting us and the entire free world.