NBU cuts key policy rate: what does it mean for the economy?

In early March, the Board of the National Bank of Ukraine decided to cut the key policy rate by 0.5 percentage points to 14.5%. In addition, the rates on 3-month certificates of deposit and refinancing loans were cut by 1.5 percentage points. This information was provided by the NBU press service.

This decision was made in view of several factors, including a further slowdown in inflation, a stable situation in the foreign exchange market, and positive developments in the provision of foreign aid, the NBU said.

According to the NBU, inflation slowed down faster than expected. In February, it dropped to 4.3% year-on-year. "The situation in the foreign exchange market also remained stable, in particular due to the NBU's monetary policy and currency supervision measures. As a result, inflation and exchange rate expectations of most groups of respondents also improved," the central bank emphasized.

Yields on bank deposits and domestic government bonds continued to exceed expected inflation, which led to continued interest in hryvnia savings. "The volume of Ukrainians' investments in domestic government bonds and deposits with a maturity of more than three months grew steadily. This limited the demand for foreign currency, and thus contributed to the slowdown in inflation," the NBU added.

On the eve of this decision, the NBU noted that inflation would remain moderate in the future, despite a slight acceleration in the second half of the year. However, the key risks remain a full-scale war and a lack of international financing. At the same time, Ukraine may receive more than USD 10 billion in March-April.

A 0.5 percentage point cut in the key policy rate should support economic recovery without jeopardizing macrofinancial stability. The situation on the foreign exchange market is expected to remain under control, with inflation moderate and attractive yields on hryvnia savings instruments.

In order to encourage banks to compete for depositors, the NBU plans to keep operations with three-month certificates of deposit as an effective element of the operational design of its interest rate policy. The rate on this instrument will be reduced by 1.5 percentage points to 17.5% starting March 15. The rate on refinancing loans is also being reduced by the same amount, to 19.5%.