The big fight: what is the NBU discount rate and what it affects

Большая разборка: что такое учетная ставка НБУ и на что она влияет

The intricacies of the NBU discount rate, the experts dealt with the support of economist Ivan Nikitchenko.

What is the discount rate

The discount rate is one of the mechanisms of monetary policy, which controls the Central Bank of the country (in Ukraine – the national Bank). In turn, monetary policy is the regulation of economic activity in the country through the number and cost of money in its economy. Therefore, it is necessary to understand that the discount rate determines the interest at which the Central Bank lends money to commercial banks. And those, in turn, lend to businesses and people. In addition, the discount rate affects the interest rate at which the Central Bank attracted by the banks free money. And further, this rate affects all other bets on Finance countries from deposits and loans to GDP to the cost of placing internal government bonds for the government. Accordingly, the lower the discount rate, the lower the cost of money in the country, and Vice versa.

It should be noted, the discount rate is not the only instrument of monetary policy, but is its Central element. And the more developed is the economy and approves the state the more attention is paid to value and dynamics of the discount rate.

How often the Bank needs to revise the rate

The revision rate depends on the situation in the economy. The key macroeconomic factor influencing the decision of the Central Bank about uchetku, is inflation. If the regulator expects price growth and sees this on the dynamics of prices, usually takes the decision to raise rates. And Vice versa. The rate can be unchanged for a year, or vary each month. For example, in Ukraine you can easily watch the number of decisions to change rates and to understand, when the economy was stable, and when in crisis. In 2005-2007, the bets were taken once a year.

In 2014-2015 this figure was three times per year. In 1995-1996, the rate was changed 9 times during the year. It is important to remember the dynamics of rate changes. So, in 1992, the NBU discount rate was 30%, and in may of 1993- 240%. Record 300% was in 1994. between 2002 and 2013, the rate was in the range of 6.5-12%, in 2015 jumped to 30%.

Why not like high-stakes financial market

As already mentioned, the highest percentage of accounting rate of 300% was recorded in Ukraine in 1994. Uchetku and the lowest 6.5% of the national Bank approved in 2013. What results in the economy it led to?

Remember the beginning of 90-ies. Then, in our country, there was hyperinflation, respectively, and popularity of bills and payments in dollars. Moreover, the consequences of the dollarization of the ordinary Ukrainians feel the still, as, for fear of another devaluation of the national currency, every spare penny converted into American currency. It is logical that in these difficult conditions-nineties, the financial market had to perform the most basic function calculations. Therefore, the credit and Deposit market in the civilized sense of the word is almost non-existent and, accordingly, was very short.

If you pay attention to the state of the Ukrainian economy in 2012-2013, it becomes clear that in that period, our country has entered a period of stagnation. In fact, economic growth was about 0%, but very low inflation. What does it mean? Instead of “drive” the economy with cheap loans, the government and the national Bank of Ukraine, on the contrary, the hryvnia was withdrawn from the financial market. The goal was simple – to prevent the growth of the dollar. The results of this policy our citizens was clearly seen in 2014. Then, the financial market began to frantically turn over this devaluation. And as a result the national currency has behaved accordingly and started to fall: if in the summer of 2014, the dollar, the average cost of 12.3 UAH this summer – 26 UAH.

The effect on the banking sector increase and decrease in the national Bank discount rate

When the national Bank raises or lowers interest rates, this change traditionally entails a change in the rates of return on government bonds, other securities and interest rates on loans and deposits for households and businesses.

You need to understand that the higher the discount rate the more banks attract deposits from the population and more difficult for financial institutions is to make loans. In such a situation for the commercial banks become more attractive debt securities Central Bank and government, as well as providing short-term loans at high rates.

And Vice versa – when the discount rate becomes lower, then banking institutions simpler to lend, and borrowers, respectively, they are easier to maintain. In this case, the attention of commercial banks shifted to the option of loans for people and business with an eye for the long term. Here is actively developing such types of loans like car loans and mortgages.

What account is the best in Ukraine

Today, the NBU considers the main task of reducing inflation to 5% a year. So the regulator tries using indicators discount rate to reduce inflation and stimulate lending.

Now the discount rate is 17.5% in the annual inflation rate below 10%. The discount rate could be lower if not for the concerns of the NBU about a possible devaluation of the hryvnia. And all because constantly present large payments on the external debt of the country, a regular delay in getting tranches from the IMF in an election year, the negative trade balance, a weak inflow of foreign direct investment, etc., Respectively, high rate accounts allows you to keep on high level return on government bonds. Thus, the government can not borrow much on spending before the election, but for foreigners such securities attractive, because Europe’s rates are 0%. Therefore, Ukraine has a good inflow of foreign currency in the financial account.

When in our country all these risks are removed, inflation may decrease to the level of 5-7%. And then the Bank will more dramatically reduce uchetku. To Ukraine revived lending, account should be 2-3%. Plus inflation of 3-4%. But a marked recovery in the credit market will be when the rate will drop to 10-12%. Then the real mortgage rates by up to 10 years will drop to 14-17%.

Christina Konovalov