The National Bank raised the discount rate for the second time in a year

The National Bank of Ukraine (NBU) will raise the discount rate from 14.5 to 15.5% per annum starting March 7. It is being raised for the second time in a year.

This was reported by the regulatorʼs press service.

This decision is aimed at maintaining the stability of the foreign exchange market, keeping inflation expectations under control, reversing the inflation trend, and gradually slowing inflation to the 5% target.

The National Bank of Ukraine noted that inflation accelerated to 12.9% year-on-year in January. According to the National Bank, it continued to rise in February. Inflation will increase in the coming months due to poor harvests and increased production costs. Inflation is expected to slow down by the end of the year.

Starting April 4, the National Bank of Ukraine will change the terms of its financial transactions to make savings in hryvnia more attractive to people and companies. This means that rates on deposits and government bonds (OVDP) in hryvnia may increase to encourage people to use these financial instruments more.

Hereʼs what will change:

• The difference (spread) between the discount rate and the rates on three-month deposits will increase. This means that deposit rates will be higher.
• The difference between the discount rate and overnight loan rates will increase. This will make loans more expensive for banks and more profitable for savings in hryvnia.
• Banks will be able to invest more funds in three-month certificates of deposit. This will allow them to attract more funds from the population for long-term deposits.

These changes will help support economic stability, reduce inflation risks, stabilize the foreign exchange market, and maintain the countryʼs international reserves at a high level. As a result, threats to prices, the hryvnia exchange rate, and international reserves will decrease.

What is the discount rate?

The discount rate is one of the main indicators of the economy. It is the percentage at which the NBU lends funds to banks and, accordingly, below which it is unprofitable for commercial banks to lend to customers. Thanks to the discount rate, the NBU influences inflation (price growth).

Lowering the rate makes loans more affordable (because the interest on them becomes lower), due to which banks begin to issue more money, there is more of it in the economy, and when there is more money, inflation gains momentum. In this case, there is less money on deposits, and more on hand — accordingly, people spend more.

But higher inflation actually leads to a depreciation of the hryvnia, because with rising prices, you can buy fewer goods for the same amount.

And all this also works the other way around — when the rate rises, loans and deposits become more expensive, which encourages people to save more. As a result, there is less money in the economy and inflation slows down.

• At the beginning of the war, the National Bank decided not to change the discount rate, leaving it at 10%, but on June 2, 2022, the NBU sharply increased the rate to 25%, which was one of the sharpest increases in history. Subsequently, the NBU lowered the discount rate several times, until in June 2024 it was 13%, in December — 13.5%, and in January — 14.5%.

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