A central bank is supposed to pursue monetary policy with two primary goals: price stability and economic growth. There are additional subordinate aims, such as a sound financial system, the stability of the banking system, the convertibility of bank deposits, the convertibility of the currency, a predictable exchange rate and the predominance of the domestic currency.
Of all these objectives, the NBU has achieved one – low inflation. Arguably, it is the most important objective, but the current zero inflation suggests it has been overdone at the expense of everything else. The list of failures is disturbing.
The Ukrainian banking system is going from bad to disastrous. At present, Ukraine is unique with its extremely high interest rates of 25-28 percent a year. The interest rates are so high because otherwise capital would quickly leave the country, since nobody believes that the effectively fixed exchange rate is sustainable. The consensus view is that it has to be devalued by at least 10 percent because of the large and rising current account deficit. The prices of and demand for steel are falling and steel continues to dominate Ukraine’s exports.