Today, April 25, the National Bank of Ukraine (NBU) decided to reduce its discount rate by 1% per annum. This is the second reduction in the discount rate in a row, which indicates the strategy of the central bank in the direction of supporting economic growth and reducing inflationary pressures.
"In view of the weakening of the actual and expected price pressure, as well as the reduction of the risks of receiving international financial support, the National Bank continues the cycle of softening of the interest rate policy. This will make it possible to support the development of lending and recovery of the economy without additional risks for price and financial stability," said NBU Chairman Andriy Pishniy.
The previous decrease took place on March 15, 2024 and amounted to 0.5% per annum.
Pyshnyi noted a slowdown in inflation from 4.3% in February to 3.2% in March. He also announced an improvement in the NBU inflation forecast for 2024 from 8.6 to 8.2%. But at the same time, the National Bank of Ukraine lowered its GDP forecast for 2024 from 3.6% to 3.0% due to Russia's attacks on energy and other infrastructure facilities.
Pishnyi named the following actual military risks for the economy:
1. Emergence of additional budgetary needs to maintain defense capability or cover significant deficits, in particular, in the energy sector.
2. Significant damage to infrastructure, primarily energy and port infrastructure, which will limit economic activity and put pressure on prices.
3. Continuation of partial blocking of borders by some EU countries for cargo transportation, which will restrain exports and make imports more expensive.
4. The deepening of negative migration trends.
5. Aggravation of the situation in the Middle East, which, in particular, increases the risks of possible interruptions in the supply of energy resources and their price increase for the world economy.
Today's decision of the National Bank on the rate will have two key consequences.
First, the reduction of the discount rate will surely trigger a new round of reductions in interest rates on household deposits. Which is confirmed by recent events. After the decision of the National Bank on the preliminary lowering of the discount rate on March 15, 2024 (by 0.5% to 14.5%), the annual average return on hryvnia deposits of individuals, published by the regulator, increased by 0.23-0.36% per year for various types of attachments:
– 3 months – from 14.38% to 14.02% per annum;
– 6 months – from 14.40% to 14.17% per annum;
- 12 months - from 14.28% to 13.98% per annum.
At the same time, we remind you that these are only nominal yields, and real yields are lower - banks deduct 19.5% of taxes: 18% personal income tax (personal income tax) and 1.5% military levy. So, the real rate (net of taxes), for example, on a 12-month investment is only 11.25% per annum, which is slightly higher than the current rate of inflation.
Secondly, there is no doubt that the reduction of the national bank rate will lead to increased pressure on the foreign exchange market and the hryvnia exchange rate. This has already become an inviolable rule: the less people and businesses can earn on their hryvnia deposits, the more actively they engage in speculative buying and selling of the dollar. Which results in fluctuations in the hryvnia/dollar exchange rate and an increase in the National Bank's foreign exchange sales from its gold and currency reserves.
Which is also confirmed by practice. From March 15 to April 25, the NBU raised the official dollar exchange rate from UAH 38.69/$ to UAH 39.47/$. And also increased the total volume of dollar sales from reserves by 69% in the last 5 weeks - from $1.7 billion (the previous 5 weeks) to $2.9 billion. Which is quite a lot, especially considering the uneven allocation of international aid to Ukraine.
