Policy Briefing Series

  • 04.11.2009

    Current issues of monetary policy in Ukraine


    Monetary policy is currently a hotly debated and highly politicised issue in Ukraine. In order to structure the debate, it is necessary to distinguish three fields: the stance, the instruments and the use of instruments of monetary policy.

    Stance. Inflation has certainly slowed down in recent times, but it is still rather high (14.1% yoy in October). Inflation expectations are even higher (17% yoy according to latest NBU information), clearly showing that economic agents are worried about the topic. Furthermore, devaluation expectations are quite widespread in the population. Finally, fiscal policy is becoming very expansionary, as indicated by the rapidly growing budget deficit, the Draft Budget 2010 and the new law raising minimum wages and pensions. Under such difficult circumstances, monetary policy has to make a major contribution in reinstalling macroeconomic stability. The only way to do this is by conducting a restrictive monetary policy. Thus, we suggest the NBU to reject appeals from policy makers for a relaxation of monetary policy. Such a relaxation would put strong pressure on inflation and on the exchange rate, without contributing to ease the existing credit crunch.

    Instruments. Overnight loans, i.e. the key instruments for providing liquidity to banks, are currently disbursed by the NBU at 15.5% (for secured loans) and at 17.0% (for non-secured loans). But the discount rate, the NBU's main instrument of communication with little importance for lending activities, stands merely at 10.25%. In our view, this discrepancy is confusing and might contribute to higher inflation expectations. Thus, we suggest bringing the discount rate in line with the rates of overnight loans.

    The use of instruments. The provision of credits to the economy by the banking system can only run smoothly if it can count on liquidity from the central bank at any time, provided that banks can fulfil the collateral requirements and are ready to pay the established price for liquidity (i.e. the policy rate). If this is not the case, banks will tend to hoard liquidity, thus increasing the cost of borrowing for the real sector and contributing to a credit crunch. This is especially true under current conditions in Ukraine, in which the inter-bank market does not work properly. Consequently, the reported complete lack of access by several banks to NBU's loans is highly problematic. It is crucial that all banks are treated in the same way. Furthermore, the NBU should avoid supporting weak and practically insolvent banks by providing liquidity. Problems of solvency should be tackled by a separate institution, with specific competences and funded by a different source (i.e. from government funds). The NBU should focus on providing liquidity to those banks, which are solvent and comply with objective requirements.

    Authors:  Kravchuk Vitaliy, Кірхнер Роберт, Джуччі Рікардо
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