The National Bank of Ukraine (NBU) in addition to conventional short-term tools of refinancing of banks is introducing long-term refinancing for the period of up to five years, the NBU said on Wednesday. “This step is aimed at meeting several goals at once, related both to maintaining financial stability in the country and stimulating economic growth,” the regulator said.
According to its calculations, the long-term refinancing mechanism will support hryvnia bank lending, enhancing the effect of other measures taken by the National Bank over the past months: lowering the refinancing rate and introducing incentive reserve standards.
“Secondly, the new instrument will serve as an additional guarantee of maintaining sufficient liquidity in the banking system. This, in particular, is also important for the smooth conduct of client operations in the face of deteriorating market sentiment due to the spread of the coronavirus disease COVID-19,” the NBU said.
According to the report, the frequency of tenders to maintain bank liquidity, volumes, terms and other parameters of long-term refinancing will be determined by individual decisions of the Board of the National Bank after consideration of these issues by its Monetary Policy Committee.
The interest rate on long-term refinancing loans will be floating as the NBU refinancing rate, which can be changed in accordance with the decisions of the board, along with a constant value in percentage points, which is valid on the day the loan is issued and will remain unchanged for the entire period of use.
If necessary, banks will be able to repay such loans ahead of schedule at any time.
In order to reduce risks in the provision of refinancing loans, the NBU also improved the standards for collateral instruments, the central bank said. In particular, it is possible to directly transfer the bank’s funds from the repayment of the National Bank’s deposit certificates and income on them to partial early repayment of debt, if the certificates are included in the collateral pool. It is also determined that a foreign currency in such a pool should be placed by the bank on NBU accounts as a cash cover without paying interest on it.
“Thus, favorable conditions are created for the development of long-term lending to entrepreneurs and the population, in particular mortgages, loans for business development and others. At the same time, banks will be able to apply for long-term refinancing in situations where they will need additional liquidity,” the regulator said.
At the same time, the NBU said that today, the hryvnia liquidity of the banking system exceeds UAH 200 billion, the currency liquidity is $8 billion, so the introduction of a new tool is more likely to be preventive in the event of a more serious crisis in the global economy.
The central bank said the introduction of a long-term refinancing mechanism was approved by the NBU Board decision No. 29 issued on March 17 amending the regulation on the interest policy of the NBU and decision No. 30 approving changes to the regulation on the application of standard instruments for regulation of the liquidity of the banking system by the NBU. These changes entered into force on March 19, 2020.
The National Bank of Ukraine (NBU) has decided from October 25 to lower the refinancing rate to 15.5% per annum from 16.5% per annum, at which it has been since September 6 of this year.
“The National Bank continues the cycle of easing monetary policy, as it expects inflation to slow to the target of 5%,” the central bank said on Thursday.
The NBU Board said that the basis of this stable trend is the gradual weakening of fundamental pressure on prices, the sign of which is the rapid slowdown in underlying inflation.
“Tight monetary policy has become one of the reasons for the strengthening of the exchange rate and improvement of inflation expectations. This influences prices significantly and exceeds the influence of factors that, on the contrary, push prices upward, in particular, the effect of still stable consumer demand,” the regulator said.
According to its forecasts, inflation this year will drop to 6.3%, and next year it will fall into the target range and reach medium-term 5% at the end of 2020.
“As before, the sharpest decrease in the refinancing rate is expected during 2020 along with the return of inflation to the target range and the improvement of inflation expectations,” the NBU said.
