National Bank of Ukraine: Uncertain times call for unconventional approaches
The economic fallout from the coronavirus pandemic presented several challenges when Kyrylo Shevchenko (pictured) took over as governor of the National Bank of Ukraine (NBU) in July of last year. But, in an interview with this website, he says that NBU has since responded to these challenges by deploying a wide range of “orthodox and unconventional” approaches to calm the financial market and the economy.
By adopting this flexible approach, he says its actions mirror those of central banks in other comparable markets as well as the world’s leading economies.
“Our dynamic approach,” he told EU Reporter, “has allowed us to factor in the long-term future of the economy whilst serving its short-term and immediate needs.”
He argues that in doing so, it was crucial that NBU created the conditions for household and corporate loans to become more affordable by easing our monetary policy.
“Indeed, we are currently leading among emerging markets in cutting our key policy rate, seeing a reduction from 11% to 6% in the space of 4 months – the lowest key policy rate in our financial history.”
Interest rates on most instruments fell gradually in response and banks responded positively by actively lowering interest rates on deposits from, and loans to, non-financial corporations, pushing them close to an all-time low.
Speaking from Kiev, he added: “We also simplified access to financing for banks by increasing the frequency of tenders, extending the term of NBU loans from 30 to 90 days and expanding the list of collateral that banks can provide to obtain loans from NBU.”
While orthodox measures were necessary, NBU, he says, also had to adopt “innovative and unconventional instruments to deal with this unprecedented crisis”.
For example, NBU provided long-term financing for banks over a period of 1 to 5 years with an interest rate that equals the key policy rate.
“Perhaps our most innovative instrument, however, was the introduction of interest rate swaps.”
These allowed banks to continue to pay low interest rates to NBU over a longer period of time. As a result, banks do not need to include interest rate risk into the rates they charge on loans to the real economy. Based on the results of 6 auctions to provide such support to the banks, the total volume of satisfied auction bids has amounted to approximately €293 million.
At the height of the pandemic, the Governor says the NBU was committed to ensuring that banks could focus on supporting the economy.
Shevchenko said: “We eased some regulatory and supervisory requirements by temporarily relaxing the requirement that banks create capital buffers and postponed the submission and publication of financial statements.
“These policies, when implemented together, allowed NBU to create conditions suitable for the future.”
Businesses, he points out, were able to receive funds at affordable rates not just for short-term needs, but for large-scale business projects that require long-term investment.
However, whilst NBU has had to adapt an unprecedented global situation, this does not mean that there isn’t room to reduce interest rates further,he concedes.
“In particular, monetary policy remains accommodative and its easing continues. Banks also possess excess liquidity, meaning it would be illogical for them to stimulate significant deposit inflows by keeping interest rates high.
“Simultaneously, it is important to bear in mind that market interest rates are affected not only by the key policy rate but also by other structural factors: high inflation, depreciation expectations – which continue to deteriorate – and the anticipated worsening of loan portfolio quality.”
Shevchenko said:”Uncertain times have called for unconventional approaches. Since July, NBU has taken the necessary steps to ensure Ukraine’s economy is in the best position for a post-pandemic future.”
Looking ahead, he said: “To maintain this success, it is essential that we continue to pursue a moderate fiscal policy, make progress in strengthening the protection of creditors’ rights, de-shadow the economy, reform our judiciary and law enforcement, and accelerate our cooperation with the IMF and other international partners.”