Andriy Pyshnyy: National Bank of Ukraine press briefing - monetary
policy decisions
Speech by Mr Andriy Pyshnyy, Governor of the National Bank of Ukraine, at a press
briefing on monetary policy decisions, Kyiv, 27 April 2023.
* * *
Dear colleagues,
The Board of the National Bank of Ukraine has decided to keep its key policy rate at
25% per annum.
This will support the effects of previous measures to improve attractiveness of hryvnia
assets, help maintain sustainability of the FX market, and form proper conditions for the
continuation of steady disinflation trend and for easing FX restrictions.
From the start of the year, inflation has been declining faster than expected,
including thanks to the NBU's measures to support exchange rate sustainability
However, the impact of the war keeps the price pressure and production costs high - in
particular, due to difficulties of running business and setting up logistics during the war.
Inflation will decelerate to 14.8% in 2023 and will return to a single-digit level in
the next years
Inflation will decelerate this year thanks to a combined effect from lower global energy
prices, restrained domestic demand, and the impact of the NBU's monetary policy.
Already this year, the economy will return to growth, which will accelerate in the
coming years on the back of a decrease in security risks assumed by the forecast
In view of the rapid recovery in the energy system and the loose fiscal policy, the NBU
improved its economic growth forecast for 2023, from 0.3% to 2.0%. Provided that the
assumptions about the security situation materialize, no significant shortages of
electricity are expected, except for some local and situational shortages that might
occur in H2. At the same time, an increase in budgetary spending on the back of large
volumes of international financial assistance will support economic activity and
consumption.
Significant volumes of official financing, coupled with the further development of
the domestic debt market, will prevent the need for monetary financing of the
sizeable budget deficit.
Despite an increase in the government's tax revenues and domestic borrowing, these
funds are not enough to finance the considerable expenditures of the state budget in
wartime and during the post-war recovery. International assistance will remain an
important source of financing to meet state budget needs.
Overall, inflows from international partners could exceed USD 42 billion this year. The
inflows from partners will, among other things, contribute to the growth in international
reserves to about USD 35 billion as of the end of this year. This will strengthen the
NBU's capability to further maintain exchange rate sustainability and gradually ease FX
restrictions.
As before, the key assumption of the forecast is that high security risks will
persist until early 2024.
The war continues.
The key risk to this forecast is that the war lasts longer and is fiercer than anticipated.
They could have a significant adverse effect on economic activity, while also worsening
inflation and exchange rate expectations. This will pose additional challenges to the
country's macrofinancial sustainability.
The war is also generating other risks. They include:
the emergence of additional budgetary needs and substantial quasi-fiscal deficits
in the energy sector
difficulties with, or the halt in, the operation of the "grain corridor" and greater
problems arising from the limitations imposed on imports of Ukrainian food by
some European countries
further damage inflicted on energy infrastructure, which could again cause
substantial power shortages
a slower decline in global inflation than expected.
Conversely, the rapid implementation of Ukraine's recovery project, together with
European integration reforms, could significantly accelerate the pace of economic
growth. The arrival of substantial financing for recovery could also provide Ukraine with
greater opportunities for easing FX restrictions.
Taking into account the risks outlined above, high uncertainty, and a significant
amount of expected budget expenditures, maintaining exchange rate
sustainability amid a pursuit of currency liberalization plans will require the NBU
to continue to take a monetary policy approach that makes hryvnia-denominated
savings highly attractive. With this in mind, the NBU Board decided to keep the
key policy rate at 25%.
Keeping the key policy rate at 25%, introducing additional instruments for preventing
household savings from being eroded away by inflation, coupled with measures to
increase competition among the banks for time deposits, contributed to greater
exchange rate sustainability. These same instruments boosted demand for hryvnia
instruments, while cutting demand for FX.
At the same time, exchange rate sustainability is primarily being ensured by tight
currency restrictions. Their effectiveness wanes over time, while their restrictive effect
on business activity grows in intensity. It is therefore becoming increasingly desirable to
liberalize FX restrictions in the foreseeable future.
To this end, the NBU is making policy efforts to establish appropriate preconditions for
an easing of administrative controls. With uncertainty still being high and the risks of
current account balances growing further amid significant budget expenditures, the key
prerequisite for preserving exchange rate stability and sustaining the decrease in
inflation is to make sure that hryvnia savings are attractive.
To maintain exchange rate sustainability, improve expectations, and steadily
reduce inflation, the NBU will continue to ensure the needed monetary conditions.
Keeping the key policy rate high will support the effects of the NBU's previous
measures and leave room for further growth in the investment appeal of hryvnia
savings. At the same time, the improved macroeconomic situation, including a deeper
decline in inflation and the accumulation of a comfortable amount of international
reserves, is creating prerequisites for revising the key policy rate forecast.
The updated macro forecast envisages the launch of a cycle of key policy rate cuts in
Q4 2023. Even if such a scenario materializes, monetary conditions will remain fairly
tight over the forecast horizon as inflation continues to slow, inflation expectations
improve, and real returns on hryvnia instruments remain high.
The NBU stands ready to adjust the time and pace of changes in the key policy
rate in view of FX market developments, inflationary dynamics, the sustainability
of international support, and the effectiveness of measures to make hryvnia
instruments attractive.
Our monetary policy decisions will continue to be consistent with our key goals
of reducing inflation and maintaining exchange rate sustainability.
Thank you for your attention!