Background reducing the discount rate: the NBU and the expert forecast

Предпосылки снижения учетной ставки: оценка НБУ и экспертный прогноз

Предпосылки снижения учетной ставки: оценка НБУ и экспертный прогноз

Deputy head of the National Bank of Ukraine Dmytro Sologub allows for the possibility of policy easing in 2019. “I believe that the potential policy easing in the current year is. But realization of this potential and the calendar option of this implementation is quite unstable and uncertain,” says Dmitry Sologub. He stressed that the implementation of this feature will depend on a number of factors, particularly the dynamics of prices, indicators of the balance of payments, terms of trade, as well as the situation regarding cooperation of Ukraine with the International monetary Fund.

The nature of the decisions of the regulator caused by factors that have a negative impact on achieving the strategic trajectory of declared objectives in the context of the new monetary design. Despite the strong decline in inflation since the beginning of the year, and record levels at the end of 2018, the Emergence and influence of a number of risks may in the future to prevent this trend.

Recall at the last meeting of the monetary policy (13.12.2018) the NBU Board decided to leave the discount rate unchanged at 18.0% per annum. Assessment of the NBU Board, current and forecasted monetary conditions are still tough enough to ensure the reduction of inflation to the target of 5% in 2020. Also, for a more flexible response to changes in the liquidity position of the banking system since the beginning of the new period, the maintenance of required reserves (11.01.19) NBU changes the operating design of monetary policy.

To this, the Central Bank six times raised the cost of money: from 12.5% to 13.5% per annum October 27, 2017, then up to 14.5% per annum from December 15, 2017, up to 16% per annum from January 26, 2018, to 17% per annum from March 2, 2018, to 17.5% per annum from July 13 to 18% per annum from 7 September. The last time the Central Bank lowered the interest rate to 12.5% from 13% to 26 may 2017.

Предпосылки снижения учетной ставки: оценка НБУ и экспертный прогноз

The previous increase in the key rate and the need of government funds resulted in the growth of yield of short term government bonds in national currency. But reducing the cost of interbank resources in December was due to the positive balance of currency interventions of the NBU and the significant budgetary costs. The result UIIR fluctuated within a corridor of rates of the national Bank for tools permanent access, gravitating to its lower boundary. In November, the hryvnia has increased retail rates. In addition to the powertrain from the previous increases in interest rates, influence on dynamics of rates had and conjunctural factors. Among them — the competition of banks for clients and further growth of demand for loans.

Important is the fact that Ukraine is a small open economy, taking the cost of capital is determined on world capital markets, and adjusted for the risk premium. In addition, this “external” cost of capital in foreign currency is formed by determining values of the level of neutral interest rates in national currency and changes in the trend of the real exchange rate.

The strategy of monetary policy, which is officially imposed by the NBU is built on the strategy of inflation targeting that can be characterized by the approach to defining the goals — achievement of specific levels of inflation. This approach does not provide specific mechanisms to achieve the goal and does not indicate what steps need to implement and act in accordance with the rule. That is, the NBU uses instruments of monetary policy depending on the situation and factors that are shaping it, focusing on the level of interest rates under a certain rule.

An effective rule, in conditions of Ukraine is the Taylor rule, which proposes their recommendations for the economies with emerging markets.

So, the rule of monetary policy on the formation of interest rates, first formulated by Taylor (Taylor, 1993), directly uses the concept when the natural rate is completely determined by the real sector of the economy and is neutral in respect of commodity prices.

The concept of the natural rate of interest, in which the “demand for loan capital and offer savings coincide, and which more or less corresponds to the expected profit generated from new capital” (Wicksell, 1898).

Rate has no tendency either to increase or to reduce prices. Lending rates tend to the natural rate, but can deviate from it due to the growth of Bank lending to the economy. In such circumstances, the upward pressure on prices continues until there is a gap between lending rates and the natural rate.

Thus, monetary policy is considered a deterrent (expansive) if the short-term policy interest rate in real terms is greater than (less than) neutral interest rate.

Taylor recommends that the real interest rate was 1.5 times higher than the rate of inflation. This is based on the assumption that the equilibrium rate that influences the real rate of inflation versus expected inflation.

Despite the fact that Taylor was inflation serves as an indicator of anticipated inflation, in practice many Central banks use inflation forecasts are actually based on the mode of targeting of the inflation Outlook. Thus, the neutral interest rate is the rate to which interest rates coincide in steady state.

According to the NBU, interest rate on hryvnia deposits business last year they increased by 5.9 VP — 14.5% per annum, including as a result of increased competition between banks for corporate clients. But the yield of deposits, despite the increase in December, remained almost at the level of December 2017 (11,7% per annum). Rates on deposits of population and business in foreign currencies at the end of 2018 was 2.7% per annum and 2.5% per annum, respectively.

At the same time, gradually increased interest rates on hryvnia loans, including increased demand for them from businesses and the public. In particular, the cost of loans for business for the year increased by 6.6 VP — to 20.9% per annum, and the cost of borrowing for households by 3.9 V. p to 33.1%. In December interest rates on business loans rose 1.2 V. p., while the population has not changed.

So, given the current state, and assuming that trends will persist in favor of economy of Ukraine, there is a theoretical possibility that the NBU may revise the real rate, reducing it by as possible to the level of a year ago, the fluctuation range of 16-17%.

But it is worth noting that, in practice, estimation of the neutral interest rate is a hard task for the makers of monetary policy. Assessing the realities of Ukraine in the context of future political battles and election-related turmoil that will provoke turbulence of economic processes, to do any forecasts could prove to be a thankless task, so you need to be more cautious in the expectations of policy easing by the NBU.