The NBU surprises with 100 bps prime rate cut, down to 10%

UKRAINE - In Brief 12 Mar 2020 by Dmytro Boyarchuk
Interesting decision of the NBU. On March 12th, the NBU Board approved prime rate cut by 100 basis points down to 10%. This move was a surprise since already for several days Ukraine’s ForEx experiences panic attack amid COVID-19 news flow. Falling global markets as well as plunged oil prices promise depreciation for national currency. Steady negative news add to the nervousness at the market. By the time of this report the hryvnia has already dropped by 8.3% from the year start and touched UAH 25.8/USD. The NBU has already spent more than $0.6 billion from reserves to defend national currency. Against this backdrop a return to tightening policy was expected. Consensus predicted prime rate unchanged for this time. Some named substantial rate increase as a reasonable move. President’s comment on the NBU work in his speech to the parliament (on the day of ex-Premier Honcharuk dismissal) made the situation quite spicy. Zelenskiy mentioned that he ‘still expects results from the NBU’ meaning he expects to see cheaper loans in economy. But, probably, this call for cheaper loans did not mean Zelenskiy was ready to see falling hryvnia. Against this backdrop it was a big question mark what the NBU Board will choose facing both economic and political challenges. Reduced prime rate is a response to the political demand, we believe. President wants cheaper loans? The NBU does its work! Rates are falling. What about exchange rate? So far the NBU believes it can resist the storm burning gross reserves and allowing gradual hryvnia decline. COVID-19 is a serious risk, but Zelenskiy infuriated with a hryvnia plunge is more serious danger for the NBU management. That’s why we see a hyb...

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