The National Bank of Ukraine (NBU) says a reduction in the key policy rate to 18% by the end of the year as part of its efforts to support economic recovery is likely, UBN reported on September 26. (chart)

Nine out of 11 members of the NBU Monetary Policy Committee expressed support for lowering the discount rate to 20% in September.

The NBU cut the key policy rate by 200bp to 20%, at the board meeting held on September 14 as inflation has been falling faster than expected this year.

Andriy Pishniy, the Chairman of the NBU board, said one of the primary drivers behind this rate reduction is the continued deceleration of inflation in Ukraine. In August, annual inflation slowed to 8.6%, a figure below the NBU's initial forecast. While the bank expects this downward trend to persist, it acknowledges that the potential for rapid inflation reduction has nearly reached its limits.

In addition to the positive trajectory of inflation, the NBU's ability to maintain exchange rate stability has played a crucial role in facilitating the rate reduction cycle. By striking a balance between reducing interest rates and sustaining the attractiveness of hryvnia savings, the NBU aims to create a conducive environment for economic growth.

The majority of the NBU monetary policy committee members believe that a moderate 2% reduction in the discount rate would not jeopardize the attractiveness of hryvnia savings or threaten exchange rate stability. Instead, it is seen as a measure to bolster the country's economic revival.

Ukraine put in the first positive growth of 19.5% in the second quarter of this year y/y, bouncing back into positive territory on low base effects, Ukrstat reported on September 22.

Ukraine’s economy experienced a deep collapse after Russia’s invasion in February 2022, with the peak contraction of 37.2% y/y in the second quarter of last year. That was worse than the peak contraction of -17% recorded in the second quarter of 2015 following the start of the Euromaidan revolution.

Taking seasonal factors into account, the GDP for the second quarter of 2023 experienced an uptick, growing by 0.8% compared to the previous quarter.

One key aspect of the NBU rate adjustment policy is its potential impact on OVDP (Ukrainian government bonds) investors. By maintaining their interest, the government can continue to attract funds on the domestic debt market and reduce the risk of resorting to budgetary emission financing should additional spending be required for defence capabilities.

Moreover, the committee members have indicated their willingness to further decrease the discount rate if certain conditions are met. This includes a steady decreases in inflation and the maintenance of foreign exchange market stability.

Market experts are largely aligned with this sentiment, with most anticipating the discount rate to reach 18% by the end of the year. Some even speculate the possibility of rates falling as low as 16-17%. These potential reductions signal the NBU's commitment to stimulating economic growth while carefully managing economic factors and financial stability.