NBU raises discount rate: economist explains what will happen to loans

Economist Oleksandr Savchenko explained that the National Bank of Ukraine’s increase in the discount rate to 14.5% is aimed at fighting inflation, stimulating the purchase of domestic bonds and increasing the activity of banks in the field of deposit certificates. He said this in a commentary for UNN.

The National Bank of Ukraine raised the key policy rate on January 24 to 14.5%, a 1% increase from the previous rate. 

Savchenko noted that there are several reasons for raising the key policy rate. According to him, first, it is a tool to fight inflation.

The second reason may be that bonds, “war bonds” as they are now called, domestic loans are tied to the discount rate. And in order to make them more popular, the discount rate is raised. Banks also have a mechanism called certificates of deposit. To make banks place more money on certificates of deposit, the key policy rate is raised. In other words, the NBU can have three goals, and I think this is a coordinated position with the Ministry of Finance. But I put the fight against inflation in the first place

According to him, the best tool to fight inflation is the key policy rate.

The expert cited an example from Russia, where the head of the central bank, Elvira Nabiullina, once banned raising the discount rate. This decision led to an acceleration of inflation, which confirms the importance of this tool for containing it.

He suggested that the policy of raising the key policy rate could also be influenced by “mercantile interests.” Banks, having more money, earn more on certificates of deposit and government bonds, which are becoming more attractive to buyers.

Savchenko noted that raising the key policy rate carries the risk of slowing economic development. He explained that a higher rate makes loans more expensive, which reduces demand for them. This, in turn, usually leads to a reduction in economic activity and a slowdown in economic development.

Savchenko also answered the question of UNNwhether there are alternative tools to control inflation.

“There is, of course, the option to issue less. It is very difficult to issue less,” the economist said.

He explained that the state budget has many items that need to be financed, and often there is a deficit. To cover this deficit, domestic bonds are issued. However, to reduce their volume, it is necessary to collect more taxes and cut spending. This solution has its advantages and disadvantages, the expert says.

Savchenko emphasized that there are no absolutely correct solutions in the economy: solving one problem often leads to another.

Recall

Last year, the National Bank of Ukraine raised the key policy rate to 13.5%, arguing that this decision should maintain the stability of the foreign exchange market, keep inflation expectations under control, and gradually slow inflation to the 5% target.