Page 69 - UKRRptOct23

8.2 Central Bank policy rate
The NBU favours reducing the key policy rate to 18% by the end of the year. Nine out of 11 NBU Monetary Policy Committee members spoke in favour of lowering the discount rate to 20% in September.
The majority of committee members decided that a moderate 2% discount rate reduction would not threaten the attractiveness of hryvnia savings and, thus, exchange rate stability. At the same time, this step would support economic recovery. In addition, a gradual rate reduction helps maintain OVDP investors' interest.
This, among other things, strengthens the government's ability to attract funds on the domestic debt market and minimize the threat of resuming budgetary emission financing in the event of additional spending to maintain defensive capability.
At the same time, all committee members predict a further decrease in the discount rate if inflation is steadily decreasing and the stability of the foreign exchange market is maintained over the forecast horizon. Most experts expect the discount rate to drop to 18% by the end of the year, and several members even predict 16-17%.
The National Bank of Ukraine (NBU) cut the key policy rate by 200bp to 20%, at the board meeting held on September 14.
Andriy Pishniy, the Chairman of the NBU board, said one of the primary drivers behind this rate reduction is the continued deceleration of inflation in Ukraine. In August, annual inflation slowed to 8.6%, a figure below the NBU's initial forecast. While the bank expects this downward trend to persist, it acknowledges that the potential for rapid inflation reduction has nearly reached its limits.
In addition to the positive trajectory of inflation, the NBU's ability to maintain exchange rate stability has played a crucial role in facilitating the rate reduction cycle. By striking a balance between reducing interest rates and sustaining the attractiveness of hryvnia savings, the NBU aims to create a conducive environment for economic growth.
However, the bank remains cognizant of the challenges that Ukraine's businesses face. Significant pressures on business expenses persist, stemming from both war-related losses and the escalating costs of electricity and fuel. These factors may impede the rapid deceleration of inflation, and the NBU acknowledges this in its decision-making process.
Looking ahead, the majority of members within the NBU Monetary Policy Committee anticipate that the discount rate will further decrease to a range of 18-19% by the end of 2023. This gradual reduction aligns with the bank's commitment to fostering economic stability and ensuring that the financial landscape in Ukraine remains conducive to sustainable growth.
The NBU's decision to lower the key policy rate reflects its ongoing dedication to navigating the complex economic challenges faced by Ukraine while simultaneously fostering an environment that encourages investment, savings,
69 UKRAINE Country Report October 2023 www.intellinews.com