The National Bank of Ukraine (NBU) is lowering a key interest rate by 2.5% starting on Jan. 31, the central bank reported on Jan 30. The rate will be now 11%, the lowest one since July 2014.
The NBU’s decision comes as a result of decreasing consumer inflation, which reached to 4.1% in 2019, the lowest level in the last six years. Now, the central bank aims to keep decreasing the interest rate down to 7% by the end of 2020.
“We have decided to continue easing our monetary policy to maintain a 5% target for inflation and to support sustainable economic growth,” said NBU Governor Yakiv Smolii during a press conference on Jan. 30.
However, even the 11% rate is still far from the 6.5% rate, which Ukraine used to have in 2013, or even 7% in 2002. During 2019, the NBU cut the key interest rate multiple times, decreasing it from 18% to 13.5%.
Smolii forecast that inflation, which plays an important role in the NBU’s decision on setting the key interest rate, will be nearly 5% for almost the entire year. But in the last quarter of 2020, it will decrease even more to 4.8%, he said. He named the appreciation of the hryvnia (Ukraine’s national currency) in 2019, relatively low energy prices and expected increases in the agricultural harvest as among the key factors in this change.
“This should have a positive impact on economic development,” Economy Minister Tymofiy Mylovanov wrote on Facebook.
However, any delay in cooperation with the International Monetary Fund or escalation of the war in Donbas could endanger the positive prognosis, Smolii said.
The key interest rate imposed by the central bank directly influences the cost of loans provided to commercial banks in the country.
Maria Repko, deputy director of the Kyiv-based Center for Economic Strategy, believes that now Ukrainian banks will start to give loans to businesses more actively.
At the same time, Repko said that she isn’t overly optimistic about the Ukrainian credit market in general: “The problem of the credit market is not only in the (rate), but also in respecting the rights of creditors, in the actual presence of a sufficient number of borrowing companies that have transparent reporting.”
However, Repko expects that lowering the key interest rate could weaken the national currency this year, which will be beneficial for the Ukrainian exporters, who suffered financial losses from the strengthening of the hryvnia last year. At the beginning of 2019, $1 cost Hr 27. Now it costs Hr 24.5.
“For them, this will mean that losses from exchange rate fluctuations won’t go up anymore,” said Repko.
