Ukraine's National Bank cuts key policy rate to 6%

The National Bank of Ukraine (NBU) has continued easing its monetary policy, cutting the key rate to 6% per annum effective June 12.

At the same time, the regulator has reduced the rate for the eighth time in a row, after lowering it in January, March, and April 2020, and in December, October, September, and July 2019.

"Consumer and investment demand is most likely to remain subdued for longer than forecast in April. On the one hand, this will keep inflation below the target level for longer than projected in the April forecast. On the other hand, this means that the Ukrainian economy will face a deeper contraction than expected. This requires the central bank to continue its monetary policy easing in order to support the economy as the country gradually lifts quarantine measures," the regulator's press service said on its website on June 11.

Given the expectation that inflation would be below its target for a longer period of time, the NBU Board cut the key policy rate by 2 percentage points (pp), to 6%. Overall, the key policy rate has decreased by 7.5 pp since the start of the current year, hitting a historic low in independent Ukraine.

"Monetary easing and other anti-crisis measures taken by the NBU in recent months will support business activity in the country," NBU Governor Yakiv Smolii said during an online briefing on June 11.

"Although the contraction has already bottomed out, the NBU estimates that the extent of the contraction in Q2 [the second quarter] will be greater than expected. Therefore, measures to put the economy back on the track to growth need to be rather decisive," he added.

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The regulator has also decided to narrow its interest rate band on standing facilities, from the key policy rate +/- 2 pp to the key policy rate +/- 1 pp.

This means that with the new key policy rate, overnight refinancing loans will be issued at 7%, and overnight certificates of deposit will be placed at 5%.

"By changing the width of the band, the NBU will be able to achieve the operational goal of its monetary policy, which is to keep hryvnia interbank rates close to the key policy rate, and within the band of interest rates on standing facilities," Smolii added.

A decrease in the key policy rate below its neutral level indicates the end of the cycle of rapid monetary policy easing.

"Given the high level of uncertainty, the NBU's future monetary policy will mainly depend on how great the fall is in consumer demand, which weakens inflationary pressures; and on the other hand, it will be driven by the speed of the recovery of business activity on the back of relaxed quarantine measures, which will accelerate price growth," Smolii said.

The NBU Board will hold a new meeting on monetary policy issues on July 23, 2020, as scheduled, the press service said.

As UNIAN reported earlier, the National Bank on April 24 cut the key policy rate by 2 pp, to a five-year minimum of 8% per annum.