The IMF recommends maintaining easy monetary policy to ensure lending, especially to small and medium-sized enterprises, and the NBU should consider this recommendation when deciding on the key policy rate. This was stated by the co-author of the study, the Head of the money markets department of the Growford Institute Mykhailo Dzhus at the presentation of the review of the monetary stance of Ukraine in 2020 at the Gorshenin Institute.
“In June, amid a sharp economic downturn, the NBU, along with reduction of the key policy rate to 6%, announced the end of a cycle of rapid easing of monetary policy. If I were asked to name the biggest flaw in monetary policy and even the entire monetary sphere in 2020, I would say that this is a loss of correlation between the dynamics of the key policy rate and the cost of government borrowing. First, it can be stated that the termination of the key policy rate reduction cycle was premature. Secondly, the NBU should have used all the arsenal of tools available to it. It is, first of all, about operations on purchase and sale of government securities on the open market
And this was not to infuse additional liquidity, but to reduce the yield of government issued bonds. The first time it should have been done in the spring, when the Ministry of Finance could not place bonds on acceptable terms for almost 2 months, and the second time – in autumn. Unfortunately, this did not happen: at the end of 2020, the weighted average yield of government issued bonds reached 11% and continued to grow in January and February to 11.5%. Doing nothing, the NBU actually dealt a powerful blow to financial stability: direct – on public finances, and indirect – on credit activity,” the expert noted.
Dzhus thinks that despite the statements about easy interest rate policy, the NBU only imitates a tremendous amount of activity.
“It should be noted that in January 2020, before the crisis, the NBU announced a reduction in the key policy rate at the end of the year to 7%. In fact, it was reduced to 6%. Therefore, the direct response of the National Bank to the unprecedented crisis in terms of interest rate policy was to reduce the rate by one percentage point compared to the pre-crisis scenario. For most of the year, the key policy rate was several times higher than the annual inflation rate. This makes the NBU’s interest rate policy in 2020 one of the toughest, at least in Europe. The IMF recommends maintaining an adaptive monetary policy to maintain household and business liquidity until vaccines become publicly available. At the same time, it is emphasized that insufficient support may pose a threat to economic recovery,” the expert concluded.
Let us recall that on March 3, the Growford Institute presented a review of the state of Ukraine’s monetary stance in 2020 at the Gorshenin Institute.