The NBU was faced with a difficult dual choice – Kyrylo Shevchenko

The different rates set by the NBU for 3-month deposit certificates and overnight certificates actually testify to a difficult dual choice faced by the regulator: to maintain consistency in managing expectations regarding inflation and the discount rate on the one hand, and on the other hand – to still force the monetary transmission mechanism to work even during war.

The former governor of the NBU, Kyrylo Shevchenko, writes in his column for "Ministry of Finance" about whether such a compromise will be justified from the point of view of the consistency of the NBU's policy and will work to support the government's debt sustainability.

The expert singled out four steps for successfully solving the issue of the cost of the hryvnia resource.

"Step 1: increasing the discount rate – as a benchmark for banks. For some time, the market was satisfied with the NBU's decision to strengthen the requirements for required reserves, which pushed banks to balance imbalances and increase the share of term deposits, which was dangerously high. Banks were expected to raise deposit rates. After the growth of the discount rate in June 2022, the banks understood the benchmarks, but, unfortunately, not everyone aspired to them. The other side is covering the deficit of the state budget at the expense of placement of the domestic government loan bonds of Ukraine (OVDPs) by the government. In 2022, banks reluctantly bought them, and the NBU had to do it for them. From the very beginning, it was clear that the measure was forced and would be limited to UAH 400 billion. The NBU repeatedly called on the Ministry of Finance to bring the yield of OVDPs to market values, but the government refused to delve into the emission risks for the economy," Kyrylo Shevchenko noted.

Analyzing the second step – "the government bonds – up to 50% of the required reserves", the former governor of the NBU recalled that at the beginning of 2023, the Ministry of Finance received a concession – the permission of the National Bank for banks to include government bonds in the required reserves, which helped the government but not solved all its debt problems.

"Thanks to this decision, at the beginning of this year, the Cabinet of Ministers was able to place its securities effortlessly. The OVDPs from the NBU’s benchmark were being bought up "like hot cakes". This allowed the government not to increase but even to decrease the yield on its securities, as it was with the benchmark OVDPs maturing in December 2024, where during three placements the rate decreased from 19.59% to 18.51% per annum. The banks could no longer be accused of ignoring the auctions of the Ministry of Finance. And at the same time, they reduced investments in the NBU’s deposit certificates by almost 30%. Everything was indicated: the strengthening of requirements for reserves, and more active purchase of government bonds," noted Kyrylo Shevchenko.

The third step, the governor of the NBU named the market yield of the OVDPs, indicating that the demand for the NBU’s benchmarks could not be endless and was limited to 50% of the required reserves.

"The goal of the regulator in such a situation is to reduce these reserves. The banking system should improve the structure of the resource base — to increase the share of hryvnia funds in term accounts, reducing the volume of funds on demand. Logically, the government should have understood it as well. Therefore, they had to work on building an adequate interest rate policy for issues of new OVDPs. And it was supposed to be plan "A". And, of course, it would be desirable to have a plan "B". This will come in handy in the near future, because many banks are already reducing their activity at auctions of the Ministry of Finance. I think the government should once again think about equalizing its rates to market levels," said Kyrylo Shevchenko.

Speaking about the fourth step, the expert noted that deposit rates have increased significantly since the beginning of 2023, and the regulator's launch of 3-month deposit certificates plays an important role in this process.

"25% per annum is an interesting yield. I think it will receive a wide response in the market. Thanks to the stable demand for 3-month deposit certificates, the NBU will be able to tie up excess liquidity even more effectively and fight against rising prices. This is a key function of the NBU – the struggle for price stability, which will form the basis of economic recovery. We would like to believe that the government also understands the importance of this, and will adjust its interest policy regarding OVDPs and start making efforts to develop the secondary market of their securities. This will definitely help with the task of achieving a 100% rollover of the government bonds in 2023, which was repeatedly declared by the Cabinet of Ministers," Kyrylo Shevchenko emphasized.

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