January 11 in Ukraine gained a new operational design of the monetary policy pursued by the national Bank of Ukraine. This should help to reach the annual inflation target at 5% (+/- 1 PPT) in the medium term and to avoid the influence of changes in the liquidity conditions of the banking system on economic growth.
“From today, 11 January 2019, the Bank will conduct monetary policy according to the new operational design that will allow it to respond more flexibly to changes in the liquidity position of the banking system of Ukraine”, — reported the press service of the NBU.
The regulator has indicated that in the past year in the banking system “has been to reduce surplus liquidity as a result of increasing needs of the population and business in cash due to the growth of the economy and transactions between the government and the National Bank”.
“This trend is likely to continue in 2019, with the result that the banking system may go into a state of liquidity shortage. During this transition the state of liquidity in the banking system may be unstable: change from surplus to deficit and Vice versa. In addition, liquidity may be segmented, that is, unevenly distributed between the banks. This necessitates a change of operational design in the direction of greater flexibility,” — said the NBU.
Major changes of monetary policy:
- The basic operations of the new design began as the tenders for the placement of certificates of Deposit for a period of 14 days, and refinancing for the same period.
- Rate 2-week Deposit certificates and rate on 2-week refinancing loans is set at the level of NBU discount rate.
- Tenders for the provision of refinancing and placement of certificates of Deposit are not limited in volume. This will enhance the role of the discount rate as the benchmark cost of interbank credit resources.
- The corridor of interest rates on operations of the permanent access for a period of overnight remained unchanged discount rate plus 2 percentage points for refinance loans, the discount rate minus 2 percentage points for certificates of Deposit. At the same time, the NBU has stopped inviting tenders to provide liquidity for a period of 90 days. Today there is a low level of interest of banks in this refinancing because of the possibility of rollover in other refinancing operations.
- Change the schedule of carrying out operations to regulate liquidity. NBU refused to hold tenders for refinancing a weekly basis and placing Deposit certificates once a week. Basic operations will now be combined and conducted only once a week on Fridays: one week — tender for the provision of liquidity and the other the placement of certificates of Deposit. Reducing the frequency of planned tenders will contribute to the development of the interbank credit market by encouraging banks to carry out operations among themselves. Extraordinary tenders, as before, will be carried out depending on the situation on the monetary market and liquidity of banks.
“Modernization of the operational design will facilitate the effective implementation of the NBU of its operating targets, even in unstable liquidity conditions. Namely, the contents of hryvnia interbank interest rates at a level close to the level of interest rates within a corridor of interest rates on instruments of a permanent access,” said the regulator, describing the expected benefits from innovation.
The regulator noted that the new design “creates conditions for a better functioning transmission mechanism of monetary policy and achieve the strategic goal of inflation at 5% +/- 1 PPT in the medium term”.
“However, thanks to the modernization of the design change in the conditions of liquidity in the banking system will not be tangible consequences for Bank lending and economic growth,” summed up the national Bank.
Earlier, the NBU said how it was possible to achieve a five-year low inflation rate of 5%. The regulator noted that Ukraine has slowed significantly, inflation and the price level.