Adviser to the Minister of Finance, founder of the GROWFORD Institute, Vitalii Lomakovych made a comment to Galinfo on the increase in the key policy rate to 25% by the National Bank of Ukraine.
Vitalii Lomakovych said that the raising of the NBU’s key policy rate by more than twice to 25% is a complete lack of knowledge or commercial interest of the National Bank’s management in attracting funds from state and commercial banks at 23% per annum.
“Currently the National Bank of Ukraine is attracting funds from banks at 23% per annum, and provides refinancing at 27%, this is the so-called “corridor +/- 2%”. If we count the liquidity that is now in the banking system and is mainly used to purchase certificates of deposit, we can estimate that extra costs of the National Bank of Ukraine will be up to UAH 40 billion during the year, if this rate is maintained. These are crazy, unreasonable expenses.
Many banks have now set 0% on deposits or some symbolic interest, because there is nowhere to invest. And the National Bank of Ukraine allows one not to invest in loans, not to revive the economy and not to stimulate economic recovery, but simply withdraws resources from the economy and absorbs them into its account, for which it pays 23% per annum. What is the logic?
When does the central bank raise the rate? When the economy is overheated and there is demand inflation. Where do you see the overheated economy and demand inflation now? If we had a crazy consumer demand, then I would understand, but we have a wartime economy, when 35% of it is not working at all, and the rest part has greatly suffered.
The trivial reason for the increase in the key policy rate is simply to give banks that have hyperliquidity and do not want to lend the opportunity to earn. Perhaps they will then share with those who raised the rate by 2.5 times. There is no other explanation.
I would note that the rate of government borrowing through war bonds will not rise by 2.5 times. Nobody will support this. On June 6, the Ministry of Finance clearly stated that war bonds were, first of all, a tool to support the state budget during the full-scale invasion of Russia, but not a tool to maximize income from investment activities, so the rates on military government issued bonds remained fixed: from 9.5% to 11.5% depending on the term.
The first consequences of the increase in the discount rate by the National Bank can be seen already today. Having an alternative for investing funds in the form of certificates of deposit at 23%, banks bought military government issued bonds at an auction on June 7 for only UAH 0.8 billion, while in May the corresponding amounts were much bigger.
Raising the rate will affect lending, which will suppress production, and launch an inflationary and devaluation spiral, since people, who still have some hryvnia, will buy dollars more actively.
There is no economic sense in this increase, said Vitalii Lomakovych.