Ukraine's monetary policy during the war and post-war periods

According to the materials of report at the meeting of the Presidium of the NAS of Ukraine, May 3, 2023

Abstract

An assessment of the National Bank of Ukraine (NBU) monetary policy instruments (key rate, FX interventions, refinancing, reserve requirements, operations with government bonds and certificates of deposit) during the war is presented. It is established that the resilience of Ukraine's monetary policy depends primarily on international financial aid.

There has been a shift from the priority of inflation targeting and a floating exchange rate in favour of monetary financing of the budget deficit. Although the enforced emission, amidst the fall in GDP and the increase in the budget deficit, increases inflation, devaluation is largely restrained at the expense of international credit and grant funds, which makes it possible to cover the losses of the NBU's foreign exchange reserves to support exchange rate stability.

It is noted that during the war, placing surplus liquidity in certificates of deposit has become banks' primary investment tool. Although the increase in the key rate led to a slight increase in deposits and government bonds rates, this action did not contribute to the transfer of household and business funds from demand deposits to time deposits and the activation of lending. Meanwhile, after a year of full-scale war, withdrawal of bank free liquidity began to be carried out not only through certificates of deposit, but also via administrative freezing at the expense of raising reserve requirements.

Among the priorities of the NBU’s wartime monetary policy, the following are highlighted: ensuring financial stability within the execution of the state budget expenditures, expanding state lending programs, increasing the maturity of deposits, and preventing capital outflows. Combining of existing monetary regimes and instruments, and expanding the goals of Ukraine's monetary policy beyond price stability are substantiated.