The National Bank of Ukraine (NBU) has now raised its rate by 16 percentage points this year alone and by 23.50 percentage points since it started raising rates in April last year in response to the fall in the hryvenia and accelerating inflation.
To cushion some of the impact on the rate rise, the NBU said it would allow banks to use the hryvenia currency to satisfy 100 percent of their required reserves, up from 50 percent.
It said this should help neutralize around US$9 billion of the impact of the exchange rate fluctuation on reserves, with banks now having to create an additional $3 billion.
The hryvenia currency came under pressure in February 2014 following the Ukrainian revolution that led to pro-Russian forces occupying the Crimean peninsula and later armed conflict in the Donbass area in Eastern Ukraine.
In 2014 the hryvenia depreciated by 48 percent against the U.S. dollar and has continued to fall this year despite various administrative measures, including last week's ban on all commercial currency trading last week that was the lifted within hours.
Today the hryvenia was quoted at 26.49 to the dollar, down another 40 percent this year. At the beginning of 2014 the hryvenia was trading at 8.24 to the dollar.
Ukraine's consumer price inflation rate rose to 28.5 percent in January from 24.9 percent in December.
The National Bank of Ukraine issued the following statement: (translated from Ukrainian)
"National Bank of Ukraine has approved a number of decisions to stabilize the money market based on the recommendations of the Committee on Monetary Policy
Board of the National Bank of Ukraine March 2, 2015 approved a number of decisions to stabilize the macro-financial situation the results of the Committee's recommendations on the monetary policy of the National Bank of Ukraine (hereinafter - ILC) regarding the need for tighter monetary policy.
At a meeting of the ILC, the state of the money market, the dynamics of macroeconomic indicators and possible scenarios for further developments.
In particular, it was noted a significant acceleration of consumer inflation - in January 2015 to 28.5% yoy. The main factor accelerating inflation was the price adjustment due to the devaluation of the hryvnia. Overall, the currency market in Ukraine is stress, which is primarily due to negative expectations on the background of continuing hostilities in the east. From the beginning, the depreciation of the hryvnia exchange rate against the US dollar was about 80%.
Even considering the extraordinary conditions of use of the Ukrainian economy, a devaluation of the hryvnia was considered excessive and does not meet the fundamental macroeconomic parameters.
The above necessitated use with already introduced administrative restrictions such comprehensive measures of monetary regulation to curb devaluation pressure on the hryvnia, reducing tension in the money market and avoid risks to price stability over the medium term:
1) Increase of 03.04.2015 discount rate from 19.5% to 30.0% per annum (by the National Bank of Ukraine of 03.02.2015 №154) with a corresponding adjustment of interest rates on active and passive transactions of the National Bank of Ukraine on regulation of liquidity in the banking system.
However, in order to avoid negative consequences for the stability of the banking system was considered appropriate to limit the impact of interest rate increase on the cost to banks stabilization loans - their value will not change.
2) The increase in banks' required reserves.
In the next period reserve (11 March - 10 April) the amount of mandatory reserves of banks with established standards will increase approximately 12 billion. UAH. That will reduce excessive liquidity of the banking system and contribute to downward pressure on the exchange rate. The main factor for this growth will exchange revaluation borrowed funds in foreign currency. Since this increase in required reserves are too tough even for the current situation in the money market and banks could complicate maintenance payments of their clients, it was decided to allow banks to satisfy its mandatory reserve requirement 100% of cash balances to banks in national currency (now you can satisfy 50% of such residues). This will help neutralize the impact of exchange rate factor on the amount of required reserves amounting to approximately 9 billion. USD. Accordingly, the amount of required reserves that banks need to create additional, increased approximately 3 billion. USD. (More precise figures will depend on the dynamics of capital raised and the exchange rate between now and the beginning of a new period of redundancy, that is, until April 10). The new reserve requirement will take effect from the beginning of a new period of reservation - namely from 11 March 2015.
3) Using hard quantitative indicators of money supply in accordance with the previous agreements with the experts of the International Monetary Fund.
At a meeting of the ILC considered and approved the previously agreed with the IMF under the new program EFF targets of monetary aggregates. In particular, the maximum increase in the monetary base in 2015, consistent with macroeconomic forecasts were estimated at 91 billion. UAH.
Settings monetary program as follows:
a significant increase of the monetary base will be ensured by providing credit Deposit Guarantee Fund of individuals to make compensation to depositors of liquidated banks to restore stability of the banking system;
hard limit growth of government bonds in the portfolio of the NBU, ie minimizing the financial support of Naftogaz and the state budget;
active use of sterilization instruments to absorb excess liquidity in the banking system to leveling inflation and devaluation pressure;
uniform distribution of quarterly profits of bank transfers to the state budget in order to prevent the destabilization of the money and foreign exchange markets.
According to experts of the National Bank of this set of measures with the already introduced administrative restrictions on the background of de-escalation of military conflict in the east and receiving funds from international financial institutions will reduce tension in the money market to reduce exchange rate volatility and create a trend to lower inflation to odnoznakovoho level in the medium term. Once these trends will become sustainable and with signs of macro stabilization National Bank of Ukraine intends to gradually soften monetary policy and administrative measures to abolish introduced.
The next meeting of the Committee on Monetary Policy held March 25, 2015."