The National Bank of Ukraine (NBU) cut its policy interest rates to 6%, the lowest point in Ukraine’s history, on the backdrop of the COVID-19 crisis, the bank announced on June 11.
The move is a continuation of the NBU’s monetary policy, which saw the regulator reduce the rate from 11% to 10% in March.
In 2019, the NBU cut the rate five times, from 18% to 13.5%, and continued the cuts in 2020.
The latest interest rate cut from 8% to 6%, effective June 12, is meant to address low consumer inflation and support Ukraine’s economy, the governor of the NBU Yakiv Smolii wrote on Twitter on June 11.
“Thus, we continue efforts to support the economy,” he wrote.
He also wrote that “subdued consumer and reduced investment demand might keep inflation below target for longer and cause deeper contraction than expected.”
Ukraine’s economy is expected to shrink by 3.5% in 2020 due to the coronavirus-related crisis, the World Bank announced this in the updated Global Economic Prospects on June 9.
Monetary easing and other anti-crisis measures of the National Bank will support business activity in the country, the bank said.
The key interest rate imposed by the central bank directly influences the cost of loans provided to commercial banks in the country, and reducing it works as an incentive for Ukrainian banks to give loans to businesses more actively.
Lowering the rates help provide support for households and businesses, and ensure that business activity picks up quickly once the quarantine is lifted.
Inflation in April-May, lower than expected, was around 2%. According to the bank, inflation was restrained by lower energy prices, increased supply of food and the “freezing” of prices for services during the quarantine.
The interest rate cut also depended on the new program of cooperation with Ukraine – Stand-By Arrangement — worth $5 billion, which was approved on June 9.
The first $ 2.1 billion of the IMF aid package arrived on June 12. These funds are aimed to finance budget expenditures and overcome the negative effects of the coronavirus pandemic and quarantine measures, but further structural reforms and the maintenance of prudent macroeconomic policies are critical, the bank stated.
The program will also increase international reserves this year and facilitate Ukraine’s access to international capital markets.
