The NBU keeps prime rate unchanged at 25% and adjusts the hryvnia exchange rate

UKRAINE - In Brief 22 Jul 2022 by Dmytro Boyarchuk
Yesterday, on July 21 the NBU Board informed on its decision to keep prime rate unchanged at 25%. High inflation (21.5% y/y in June with a 30% perspective in 2022), substantially damaged economy by Russian aggression (the NBU estimate a near 40% GDP plunge in 2Q 2022), hryvnia printing for the needs of budget deficit financing are obvious reasons to keep the prime rate at high level. The NBU projects the prime rate will be at 25% till 2Q 2024 which might be too pessimistic but it gives clear signal to Minfin on the need to adjust rates in domestic bonds. In fact, MinFin keeps resisting interest rates increase for bonds and pushes the NBU for printing more and more hryvnia. Partially the hryvnia injections are covered by loans and grants from our foreign partners. However, the NBU is apparently unhappy with such state of affairs especially after the prime rate was increased in June. Only at the last auction on July 19 Minfin rates for one year securities up to 14% from 11% previously. Obviously, this level is far too modest amid inflation heading towards 30% and deposit certificate rates at 23%. Though the NBU left everything unchanged with the prime rate, it made a serious step on the hryvnia exchange rate. The exchange rate regime remains unchanged given permanent uncertainty from the war but it was adjusted by 25% in one move up to 36.5686 UAH per 1 dollar from 29.2549. In fact, the retail exchange rate was on the level of UAH 36-37 / USD from the beginning of the war. On some dates the level jumped even to UAH 39/USD. However, the NBU fixed official exchange rate at the level of 29.2549 and it was a reference point for legal entities that sold and bought foreign cur...

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