The NBU hikes prime rate up to 25% amid aggravating economic problems

UKRAINE - In Brief 03 Jun 2022 by Dmytro Boyarchuk
The NBU Board decided to hike prime rate by 15 ppt up to 25%. The decision had a kind of shocking impression on everyone. We still have scarce information on what is happening with the economy (no reports on industrial output, retail trade, agro-production, customs statistics) and this hike was a wake up call to signal that things are getting worse with the economy. Just two weeks ago the NBU made a move apparently in attempt to fight foreign cash outflow. The Central bank allowed free pricing for foreign currency for individual purchase while it left the official (fixed) exchange rate for legal entities, which effectively legalized a multiple exchange rate regime. That was a signal that something bad in the FX market was happening, and Ukrainians read the signal, promptly rushing to buy foreign currency. From the press-release yesterday we learned that FX intervention of the NBU jumped to $3.4 billion in May ($2.2 billion in April), meaning that the current regime of a fixed hryvnia exchange rate (with multiple exchange rates) coupled with the active participation of the NBU in deficit financing was becoming too costly for gross international reserves. The NBU faced a choice either to relax exchange rate controls, which might trigger extra social tension under current circumstances, or to tighten the monetary regime sharply. The NBU decided that currency shock is not a good way for us to go, while an elevated prime rate might reduce hryvnia printing needs by strengthening demand for state bonds, thus channeling the excessive liquidity of the banking system that we still enjoy, to cover budget deficit financing needs. In fact, the balance of payments was more or less f...

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