Most members of the Monetary Policy Committee of the National Bank consider it necessary to further increase the discount rate in the near future, provided that signs of persistent inflationary pressure and the threat of imbalance in inflation expectations persist. But the regulator will make the final decision after updating the macro forecast in January. This is reported by the NBU press service.
They recall that on December 12, the NBU Board decided to increase the discount rate from 13% to 13.5% in order to maintain control over inflation expectations and return inflation to a decline next year.
It is noted that the increase in the discount rate by 0.5 percentage points was supported by seven out of 11 members of the Monetary Policy Committee. They noted that such a step is the most considered. On the one hand, it takes into account the expected transience of key factors of the current price surge and the stability of inflation expectations. On the other hand, it is necessary to keep expectations and inflation under control.
In their opinion, an increase in the discount rate by 0.5 percentage points, together with measures to maintain the stability of the foreign exchange market, will be sufficient for now to demonstrate the NBU’s readiness to contain price pressure, ensure protection of hryvnia savings from inflation, and prevent a sharp deterioration in expectations.
In contrast, two more participants in the IMP discussion spoke in favor of a more significant increase in the discount rate in December – to 14%. They insisted that the NBU should act urgently and decisively, because inflation has not only exceeded the NBU’s forecast for several months in a row, but has been growing at a fairly rapid pace, creating the threat of an inflationary spiral.
The regulator emphasizes that inflation in annual terms has already crossed the 10% mark, and its prolonged stay at a double-digit level may lead to a decline in demand for hryvnia savings instruments and a weakening of confidence in the NBU’s monetary policy.
Two more of the 11 members of the MPC voted to keep the policy rate at 13% in December. They consider it inappropriate to increase the policy rate, given the time-lag effect of its change (the so-called monetary transmission lag). In their opinion, the exhaustion of the effects of this year’s poor harvests should contribute to the slowdown of inflation in 2025.
What will be the NBU’s interest rate policy next?
According to the NBU, the majority of MPC members noted the need for a further increase in the policy rate in the coming months, provided that signs of persistent inflationary pressure and the threat of an imbalance in inflation expectations persist.
In turn, several MPC members were unsure of the need to increase the policy rate due to the temporary nature of the inflationary surge.
According to supporters of the rate increase, in order to regain control over expectations and inflation dynamics, it is better for the NBU to act preventively now than to resort to a more significant increase later.
In addition, most members of the MPC stated the need to continue the cycle of tightening interest rate policy in the coming months if signs of persistent inflationary pressure persist. Two of them suggested the possibility of several increases in the discount rate in January-April 2025.
As noted by the regulator, the update of the macro forecast in January will provide more information on the persistence of price pressure and the risks of imbalance in expectations.
Discount rate reduction
It should be noted that in early June 2022, the National Bank, in view of the emergency situation, rapidly raised the discount rate from 10% to 25%. The rate of 25% lasted from that time until the end of July 2023. However, on July 27, the NBU announced its reduction to 22%.
And on September 14, the discount rate was reduced from 22% to 20%. This decision was facilitated by the rapid slowdown in inflation and a fairly stable situation in the foreign exchange market, which made it possible to continue the cycle of reducing the key rate. From October 27, the NBU set the discount rate at 16%, equalizing it with the rate on overnight certificates of deposit (CDs). And from December 15, 2023, the NBU decided to reduce the discount rate from 16.0% to 15.0% per annum.
On March 14, the NBU reduced the discount rate by 0.5 percentage points – to 14.5%.
And on April 25, the regulator decided to reduce the discount rate by 1 percentage point – to 13.5%. Along with the reduction in the discount rate by 1 percentage point, the rates on overnight certificates of deposit and three-month certificates of deposit decreased to 13.5% and 16.5%, respectively.
The Board of the National Bank of Ukraine decided to reduce the discount rate from 13.5% to 13% from June 14, 2024.
In September and October, the Board of the NBU decided to keep the discount rate at 13%.
