The NBU cuts the key policy rate to 16%: What does this mean for the economy?

The National Bank of Ukraine (NBU) has decided to cut its key policy rate from 20% to 16%. This decision was made on October 27 and is part of the modernization of the operational design of monetary policy, where the key policy rate is compared to the overnight deposit certificate rate, creating a "lower bound" system.

The NBU press service announces this decision and provides additional explanations. According to the new rules, rates for other transactions between the NBU and banks remain unchanged: the rate for three-month deposit certificates will be "discount rate + 4 percentage points" (20%), and the rate for refinancing loans will be "discount rate + 6 percentage points" (22%).

The NBU sources note that in fact, the interest rates on transactions between the NBU and banks remain unchanged. This modification in the operational design of monetary policy will help to strengthen the signaling role of the key policy rate in the context of a structural liquidity surplus.

According to the NBU, these changes will keep short-term hryvnia interbank rates close to the key policy rate, which will increase the NBU's ability to influence economic agents' expectations and their economic behavior.

The NBU's standing rates on its operations with banks are currently agreed upon to maintain the attractiveness of hryvnia instruments, which is important for ensuring moderate inflation and exchange rate stability over the forecast horizon.

On the other hand, this is also important for households, as it allows them to protect their savings from inflation, especially as it is expected to accelerate to 9.8% next year. This policy favors the preservation of hryvnia-denominated instruments, such as deposits and domestic government bonds (T-bills).

Given that there are no signs of a deterioration in the balance of risks and that market participants have successfully adapted to the new currency regime, the NBU is considering further cuts to the key policy rate at its next meeting.