Coronavirus and supporting the financial service sector: How the National Bank of Ukraine has met the challenge 

Aside from the severe public health implications of tackling the virus, Coronavirus has posed significant challenges to Ukraine’s financial services sector – undermining the stability of balance sheets, risking the survival of our businesses and imperiling jobs.

In order to face down this crisis, the National Bank of Ukraine (NBU) has taken a broad range of measures to reduce turbulence on the Ukrainian financial market; laying the foundations for economic recovery.

In order to get the Ukrainian economy back on track, the NBU has adopted a number of key policies, including providing cheaper financing for businesses, households and governments by cutting the specific interest rate that determines bank lending rates (the “key policy rate”), supporting liquidity and expanding the funding base of banks and encouraging financial institutions to ramp up lending through introducing interest rate swaps and relaxing regulatory and supervisory requirements.

The NBU is maintaining the key policy rate at an all-time low, at 6% per year - down by 7.5% from the start of 2020. Today, Ukraine is taking the lead among emerging markets in cutting the key policy rate since the pandemic broke out.

Interest rates on most instruments have fallen gradually in response to the lowering of the key policy rate. Banks have actively lowered interest rates on deposits from, and loans to, nonfinancial corporations, pushing these rates close to all-time lows. More specifically, the weighted average interest rate on Ukrainian currency (hryvnia) corporate loans fell below 10% in August, while that on deposits remains below the key policy rate. The weighted average interest rate on hryvnia household deposits also dropped below 10%.

Crucially, when it comes to protecting individuals and families from the worst of the financial fallout from the Coronavirus crisis, the average quarterly interest rate on hryvnia household loans decreased for the first time in the last year and a half.

As the Governor of the National Bank of Ukraine, I am committed to maintaining an understandable and predictable monetary policy that provides comfort to both Ukrainian citizens and our international partners. This has helped decrease uncertainty among financial market participants, enabling them to adapt their expectations to the future cost of financial resources. As a result, the cost of Ukrainian hryvnia financing for the budget has hit a record low.

A number of tools for managing liquidity and minimizing exchange rate and interest rate risks have helped decrease market interest rates on hryvnia loans when the strictest quarantine restrictions were in place.

To make banks more flexible in terms of liquidity management and to support the economy in a crisis, the NBU has introduced support loans for the banks. These loans mature in one to five years and carry interest rates that equal the key policy rate.

The NBU has already issued €640 million (UAH 21.4 billion) in these loans. Additionally, we have expanded the list of acceptable collateral that the banks can pledge against loans from the central bank. This list includes publicly guaranteed corporate bonds and municipal bonds.  Finally, we have adopted a new financial instrument – interest rate swaps – that will allow banks to keep paying low interest rates to the NBU for the foreseeable future.

In Ukraine, any solvent bank that temporarily needsfunds can now quickly and easily take out loans from the NBU. Furthermore, the banks can use interest rate swaps to fix affordable rates on 2–3 years loans to deliver on areas of critical need – including loans for SMEs and large infrastructure projects.

I am aware that there is still room for a further reduction in interest rates in the financial market.  In particular, I will ensure that monetary policy continues to reflect market conditions and that banking stability remains vibrant – avoiding a situation where lenders do not maintain artificially high liquidity by keepinginterest rates high.  It should be noted, however, that market interest rates are affected not only by the key policy rate but also by other structural factors, such ashigh inflation and depreciation expectations, which continue to deteriorate, and the anticipated worseningof loan portfolio quality.

To reduce interest rates further and return Ukraine to economic growth, it is more important than ever to pursue a sound fiscal policy.

To do this, we must make even more progress on strengthening the protection of creditors’ rights, clamping down on the shadow economy, pursuing meaningful reforms to the judiciary and law enforcement agencies and increasing cooperationcooperation with the IMF and Ukraine’s other international partners.

Ukraine has faced – and faced down – significant challenges in recent years.  For the National Bank of Ukraine, the work of fighting Coronavirus and ensuring the recovery of our economy is well in-hand.

Kyrylo Shevchenko is the governor of the National Bank of Ukraine.