You're reading: Ukraine’s central bank cuts key interest rate

Even as doubt continues over the date of disbursal of the next $1 billion loan tranche from the IMF to Ukraine, the National Bank of Ukraine is moving to relax its monetary policy, sending a positive signal to the country’s businesses.

At a news conference
of the NBU executive board on July 28, the central bank announced another
reduction in its key interest rate, the discount rate, by a further one
percent, to 15.5 percent.

The move should help
revive long-term crediting and stimulate the economy. At the moment, the banks
issue loans to corporate clients at an average interest rate of 22.2 percent
per annum, according to NBU website.

Apart from that, the
bank also extended the settlement deadlines for export-import transactions from
90 to 120 days, making trade easier for manufacturers of long-cycle products.

The NBU also
simplified the payments procedure for import contracts. Earlier, businesses had
to use a letter of credit to settle contracts exceeding $500,000. Now they will
need one only if the contract value exceeds $1 million.

The NBU’s key interest
rate peaked at 30 percent in March 2015, and it imposed controls on the
movement of capital in and out of the country in August 2014 to counter a rapid
collapse in the value of the hryvnia. However, these controls have also
depressed business activity and shut off foreign investment.

Reasons for optimism

The key reason is low
inflation. It slowed to 6.9% in June due to low consumer demand and sluggish private
consumption. Simply speaking, most Ukrainians don’t have much money to
spend.

The supply of raw
foods caused by the seasonal increase in domestic production has also contributed
to low inflation figures.

And finally, the
foreign markets continue to be favorable for Ukraine’s key export commodities.
Since the beginning of the year the price of steel has grown by 30 percent,
iron ore price is up 35 percent, and maize and barley are up by 10 and 22
percent respectively.

As a result, the
supply of foreign currency is increasing on the foreign exchange market,
exceeding demand.

Ukrainians becoming
accustomed to a floating exchange rate has also contributed to low inflation
expectations.

“We see that the
business and the population are gradually getting accustomed to the exchange
rate fluctuating within certain limits,” Dmytro Sologub, the NBU deputy chief
said during the news conference.

The decision to lift
the ban on the repatriation of dividends in June did not create additional
pressure on the foreign currency supply, according to the NBU.

“The volume of
currency bought for repatriation of dividends amounted to some $100 million,
which was slightly lower than the declared (amount of dividends for repatriation)
and its share of overall demand on the currency market was small,” NBU
Governor Valeria Gontareva said.

Further plans

Any new moves towards
deregulation will depend on of the market’s reaction and whether it will keep
within the 12 percent inflation target this year and eight percent inflation
next year.

“We’re demonstrating
to everyone that we’re reducing it (the interest rate), and our target level is
the level of inflation,” Gontareva said.

Further monetary
stability will depend on the resumption of Ukraine’s cooperation with the International
Monetary Fund, the situation on the foreign markets, and events in the war-torn
Donbas.

But if everything goes
in line with the NBU’s macroeconomic forecasts, the central bank will be able
to cut its interest rate to a level favorable for crediting by 2018, according
to Sologub.

“Mass crediting in the
corporate segment will start when we see rates at 12-14 percent,” Sologub said.
“And arithmetically, we can calculate that the central bank interest rate
should then be at the level of 10 percent.”

Kyiv Post staff writer Olena Savchuk can be reached at
[email protected]