The NBU kept the discount rate at 25% and increased the competition of banks for household deposits

Sofiia Telishevska

The National Bank of Ukraine (NBU) kept the discount rate at 25%. The regulator also introduced a set of additional measures to increase the competition of banks for time deposits of the population.

The NBU expects that the increasing attractiveness of time deposits in hryvnia against the background of a decrease in the cash rate will encourage depositors to increase savings in hryvnia. This will strengthen the stability of the foreign exchange market, protect international reserves and have a positive effect on exchange rate and inflation expectations.

Among the risks that may have a negative impact on inflationary dynamics, the NBU sees:

  • duration and intensity of hostilities; further destruction of critical infrastructure facilities;
  • additional budgetary needs and significant quasi-fiscal deficits in the energy sector;
  • complication or termination of the "grain corridor";
  • premature easing of monetary policy by leading central banks.

International financial assistance will remain the main source of covering deficits in the state budget and balance of payments.

"Taking into account potential inflows of funds from international partners, in particular from the IMF, and further activation of the domestic debt borrowing market, budget needs will be fully financed in 2023 without monetizing the budget deficit," the NBU press release said.

A significant amount of the populationʼs funds is stored in bank current accounts, which generates additional risks for macro-financial stability, especially if administrative restrictions are further eased.

"In the largest banks, which, in particular, enjoy the non-competitive advantages of obtaining liquidity, hryvnia rates remain insufficiently attractive for depositors given the high level of current and expected inflation," the NBU press release notes. In order to encourage banks to raise interest rates on term deposits, the National Bank is introducing a set of additional measures.

Thus, from April 7, 2023, the NBU will introduce a three-month deposit certificate at a fixed rate at the level of the 25% discount rate. Banks will be able to place funds in such certificates depending on the amount of hryvnia deposits of the population with an initial term of three months. The first tender for placement of decertificates for up to three months is scheduled for April 7, 2023. The NBU plans to use this tool for at least a year.

The NBU also lowers the overnight deposit certificate rate to 20%.

From May 11, 2023, preferential standards for the formation of mandatory reserves by banks for term funds on the accounts of individuals will be 0% in hryvnias and 10% in foreign currencies (10%) and will apply only to deposits with an initial term of three months or more.

"The implemented measures will strengthen market incentives for banks to attract time deposits of the population in hryvnia. This will reduce risks for the foreign exchange market and international reserves at the stage of easing currency restrictions," the regulator explains. At the same time, these measures will contribute to the growth of interest rates on term deposits and, accordingly, will strengthen the protection of citizensʼ hryvnia savings against inflationary depreciation and will revive the activity of banks in the interbank market.