The NBU may lower the interest rate to 21% at the end of the year
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The National Bank admits that in the IV quarter of the year it can reduce the discount rate to 21%, and in 2024 – to 18%.
This is stated in results discussions of the members of the Monetary Policy Committee (KMP) of the NBU.
All 11 of the 11 members of the Committee were present at the meeting, and most of them believe that the regulator can reduce the discount rate to 21% by the end of this year.
The beginning of the rate reduction cycle only in the IV quarter of the year is due to the fact that the priority is currently the easing of part of the currency restrictions. With the beginning of currency liberalization, an unchanged discount rate will be an important tool for managing expectations and risks.
When the NBU is confident in the controllability of the exchange rate and inflationary processes due to the easing of restrictions, it will be able to start a rate reduction cycle without threats to macro-financial stability.
At the same time, the potential for lowering the rate is significantly limited by the negative consequences of the war, because recovery will take considerable time, while import needs during the recovery phase will be significant. Under such conditions, the NBU must maintain exchange rate stability: ensure high attractiveness of hryvnia savings and reduce pressure on international reserves.
Taking into account the expected international aid, which will close the current account deficit, in 2024 the NBU will be able to continue lowering the discount rate, but it will be quite slow. According to the vast majority of members of the KMP, at the end of next year the discount rate will be 18%.
At the same time, one of the participants of the KMP believes that the faster-than-expected decline in inflation will allow the NBU to reduce the discount rate to 18% by the end of this year and to 14% in 2024.
Another member of the KMP sees the prerequisites for lowering the rate to 20% at the end of this year and to 16% next year.
Several KMP members also noted that forecasting for 2024-2025 is extremely difficult due to the high level of uncertainty associated with the war.
Regarding the decision to leave the discount rate at the level of 25%, which the regulator announced on April 27, it was supported by 9 out of 11 members of the Committee. In their opinion, the easing of the most onerous currency restrictions is becoming more and more important, and this is possible without creating additional shocks, only if savings in the hryvnia remain highly attractive.
In addition, the NBU’s conservative assessments of the circumstances leave room for the regulator to react in case the situation unfolds according to a negative scenario. Lowering the discount rate will weaken the NBU’s ability to make such a maneuver. Currency restrictions, on the other hand, leave opportunities for a faster and more targeted response.
Two more members of the KMP spoke in favor of reducing the discount rate to 24% in April. They believe that the improvement of macroeconomic conditions and the improvement of the inflation forecast, even taking into account the risks, allow to start a gradual reduction of the rate as early as April.
One of the panelists noted that the pro-inflationary risks are overstated, because Ukraine has successfully overcome the energy crisis, and over time the pressure on prices due to business costs for autonomous operation in case of power outages will be exhausted.
He added that even logistical problems with food exports can contribute to disinflation in the domestic food market. Therefore, he believes, the NBU should not delay the start of the discount rate reduction cycle, because when the need for more decisive steps arises in the future, it will be more difficult to implement them promptly without a negative impact on financial stability.
We remind you:
As expected, the National Bank made a decision save discount rate at the level of 25%.
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