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On September 8, a regular meeting of the Board of the National Bank of Ukraine on monetary policy was held, following which the key policy rate was announced to be maintained at 25%.   

Under current conditions, this level of the key policy rate is sufficient to maintain exchange rate stability and keep inflation processes under control, the NBU press release states.    

However, this did not come as a surprise – most of the interviewed banks and experts expected exactly this decision of the NBU (maintaining key policy rate at the current level).       

There is a little more uncertainty in the exchange rate issue: will the National Bank of Ukrainechange the official exchange rate again, given the fact that the cash market rate is approaching 42 UAH/USD?    

Answering a provocative question regarding the prospects for the next revision of the official exchange rate during a press briefing NBU Deputy Governor Serhii Nikolaichuk said verbatim as follows:

 I can assure you that at the moment we definitely see no reason to revise the official exchange rate. The National Bank of Ukraine has enough opportunities to keep the rate fixed at the current level.”  

Hopefully, this time Mr. Nikolaichuk’s assurances have a stronger basis than previous promises to keep the official exchange rate at 29.25 UAH/USD until the end of martial law.   

It’s no surprise that the National Bank of Ukraine is still at a loss to explain what it did with the official exchange rate in July (the so-called correction). Both NBU Deputy Governors, present at the press briefing, used the mysterious word “re-pegging” to denote that mysterious step.

However, the nature of the measures that the National Bank of Ukraine plans to implement to strengthen the effectiveness of its monetary policy remains the biggest intrigue of the last meeting of the NBU Board on monetary policy.

The following is the quote from the press release: The National Bank of Ukraine is working on measures to enhance monetary transmission and minimize the negative impact of the budget’s monetary financing on inflation and the FX market.”      

The “design” of monetary policy (the configuration of interest rates on active and passive operations of the NBU), taking into account the level of the key policy rate, is already tight and leaves no room for maneuver.    

In addition, according to NBU Deputy Governor Yurii Heletii, the National Bank of Ukraine does not currently plan to increase reserve requirements.     

When Bloomberg asked to specify the NBU measures for improving the monetary transmission, Heletii replied that “we will not reveal all our cards”.   

And he continued: “The functioning of the secondary market will be important for us. We are looking at the situation on the primary market and then we will take measures. (…) If we do not see the appropriate level of measures for monetary transmission purposes, we will have to act.”   

Given these hints, one can assume that their real addressee is the Ministry of Finance, and the announced measures may relate to the entry of the National Bank of Ukraine into the secondary market of government issued bonds.      

A month after the stock market resumed, the volume of government bond trading remains small, and government issued bonds with a maturity of one year are traded in the secondary market with yields around 18%.    

This, obviously, goes against the NBU’s desire to increase the yield of government issued bondsin the primary market to the level of the key policy rate.  

On September 12, the National Bank of Ukraine resumes the publication of the zero coupon yield curve for government issued bond, which was suspended with the start of a full-scale war. Taking into account the insurmountable desire of the National Bank of Ukraine to make the Ministry of Finance raise interest rates on government bonds in the primary market, it cannot be ruled out that the regulator may make efforts to ensure that this curve has the desired trajectory for it.  

If the NBU prints UAH 3-4 billion every month to pay interest to banks on deposit certificates in the blink of an eye, nothing will prevent it from entering the secondary market to sell government issued bonds from its own portfolio at dumping prices to create desired benchmarks for government issued bonds yields in the primary market.   

As a bonus, a certain amount of liquidity will be sterilized, which will help the National Bank of Ukraine to position these actions as anti-inflationary.   

If the above assumptions are correct, then it is not surprising that the National Bank of Ukraine“does not reveal the cards”. Because these actions would be difficult to call friendly towards a country in a state of war.    

Another intrigue concerns not the nature of monetary policy, but the form of its implementation. Despite the fact that monetary policy issues belong to the sphere of management of NBU Deputy Governor Serhii Nikolaichuk, the press briefing on September 8 was a real benefit of his colleague Yurii Heletii. Why would it be?..

Mykhailo Dzhus, Head of the Money Markets Department of the Growford Institute