The NBU cuts the prime rate by an extra 2 ppt down to 20%

UKRAINE - In Brief 14 Sep 2023 by Dmytro Boyarchuk
In August, with inflation easing to +8.6% y/y, strong gross international reserves at $40.4 billion (equivalent to 5.4 months of future imports), and a relatively stable FX market, all signs indicated that the NBU Board would cut the prime rate again in September. Experts had anticipated a 2 ppt reduction in the prime rate as a prudent move, and the NBU's decision perfectly matched these widespread expectations. Additionally, the NBU decided to modify some incentives for banks to attract hryvnia savings deposits. Specifically, they reduced the portion of hryvnia savings deposit funds that can be used to purchase lucrative three-month deposit certificates. These three-month deposit certificates maintain a rate equal to the prime rate (20%). The rate for overnight deposit certificates was lowered to 16%, and the refinancing rate was reduced to 22%. Future adjustments of the prime rate will largely depend on the trends in the FX market. Although Ukraine is receiving significant support from international partners, there is a concerning trend of a widening trade deficit, primarily due to a surge in imports against the backdrop of stagnant exports. If the FX market remains stable until the end of October, another reduction in the prime rate will be highly probable. As a reminder, according to the July minutes, the Monetary Committee discussed a target of 18-19% for the prime rate by the end of 2023.

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