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Challenges for the Central Bank in
exerting influence on short-term
interest rates
(the case of Ukraine)
Volodymyr Lepushynskyy
National Bank of Ukraine
Brief macroeconomic overview
Real GDP grow th and inflation
15
real GDP
CPI
12.1
13
11
12.3
11.6
9.6
9.2
10.3
9
8.2
7
6.1
7.1
5.2
5
2.7
3
1
2006
2005
2004
2003
-0.6
2002
-1
2001
• Sufficient (but volatile)
GDP growth for the
last 7 years;
• Volatile and high
inflation generates
unpredictable
business
environment;
• Economy has high
level of openness.
Former monetary regime
Ukraine had been using uncommon kind of
monetary regime:
•announcement of 4 targets in MP Guidelines;
•de-facto peg vis-à-vis the US dollar with
commitment to achieve pre-specified level of
money growth;
•insufficient role of an interest rate policy.
Former monetary regime
Consequences
Positive:
economic stabilization after long period of hyperinflation and
financial crisis;
credibility to monetary authority;
accumulation of reserves.
Negative:
ineffective control of the inflation;
underdeveloped domestic market;
exposure to a risk of speculative attack;
high level of dollarization.
New monetary regime
• adoption of inflation targeting in the future
prospect;
• gradual move towards flexible ER;
• increasing role of interest rate policy.
Theoretical background
Exerting influence on short-term interest rates
Key interest
rate
 usually interest rate on a
main instrument
(refinancing/mobilization);
 signals the stance of the
market;
 differs from operating guide
(normally – one-two weeks’
maturity)
Interest rates
corridor
Interest rate –
operating guide
 pegged to the key interest rate;
 the highest level of the interest rate –
interest rate on refinancing, the
lowest – interest rate on mobilization;
 key interest rate is in the middle of
the corridor;
 maturity coincides with operating
guide
 has maturity up
to 3 months
(overnight is the
most frequent)
Theoretical background
Key interest rate selection
key interest rate is
an interest rate on
mobilization operation
key interest rate is a
refinancing interest rate
disadvantages
 implementing monetary policy is
inactive;
 Large inflows of short-term fund
(hot capital) from abroad is
possible
 liquidity position is unstable (results
from external factors)
Ukrainian experience
Insufficiently effective adjustment
in short-term interest rates
uncommon
approach to MP
de-facto pegged regime
regime
characteristic
Present model of monetary policy contradicts
implementation of common model of interest rate policy
consequences of regime
interest rate is not used
as an operating guide
interest rate is not
a main instrument of
monetary policy
Ukrainian experience
Insufficiently effective adjustment
in short-term interest rates
initial conditions
discount rate does not
play a key role
ineffective interest rates
corridor (overnight)
 real operation is not put into
practice by a discount rate;
 maturity terms of corridor rates was
unstable
 legislative definition of a discount
rate is not equal to its usage
 changes of the ceiling and floor rate of
the corridor are unsynchronized and
not necessarily linked to changes in a
discount rate;
 refinancing mechanism conditioned to
the requirements of prudential
supervision.
Discount rate
Overnight NBU
01.01.07
01.10.06
01.07.06
01.04.06
01.01.06
01.10.05
01.07.05
01.04.05
01.01.05
01.10.04
01.07.04
01.04.04
01.01.04
01.10.03
01.07.03
01.04.03
01.01.03
01.10.02
01.07.02
01.04.02
01.01.02
%%
Ukrainian experience
Interbank market of Ukraine
20
Political crisis
16
12
8
4
0
Overnight (market)
Ukrainian experience
Improvement of Central Bank’s influence on
short-term interest rates
satisfied conditions
Improvement in the approach
to monetary strategy
 priority of price stability in
perspective;
 moving towards greater exchange
rate flexibility;
 rejection of setting target of
monetary aggregates
Improvement of instruments
regulating banking liquidity
 overnight refinancing/mobilization
with daily frequency;
 refinancing/mobilization with weekly
frequency and maturity of 14 days;
 minimization of prudential
requirements for refinancing
mechanism
overnight rate (market)
10
interest rate on main
refinansing/mobilization
operations with 14 days
4
2
0
pre-announced overnightrate on
refinansing/mobilization operations
23.03.07
16.03.07
09.03.07
02.03.07
23.02.07
16.02.07
09.02.07
02.02.07
26.01.07
19.01.07
12.01.07
6
05.01.07
8
29.12.06
22.12.06
15.12.06
08.12.06
01.12.06
24.11.06
17.11.06
%%
Ukrainian experience
Implementation of interest rate corridor
12
Ukrainian experience
Improvement of Central Bank’s influence on
short-term interest rates
conditions should be satisfied
improvement of interest rate
setting for the National Bank
operation
improvement of structure
liquidity management
mechanism
 discount rate is a key interest rate – the  increasing activity of transactions with
highest/lowest level of interest rates on
Government bonds on the open
2 weeks’ refinancing/mobilization;
market;
 interest rate on refinancing/mobilization  restructuring Government debt to the
changes generally in the same time and
National Bank in liquid Government
in the same direction;
bonds;
 discount rate and interest rate on 2
 developing Government bonds market
weeks’ refinancing/mobilization is in the
(primary dealer, strengthening clarity
middle of the overnight corridor
of Government action)
Ukrainian experience
Improvement of Central Bank’s influence on
short-term interest rates
high level of discount rate
(result from CPI)
constrains ceiling of corridor
low interest rate on the inter bank
market (result from large liquidity)
constrains floor of corridor;
reason
IMPOSSIBILITY OF IMMEDIATE APPLICATION OF
NARROW OVERNIGHT CORRIDOR
conditions should be satisfied for
initial stage
wide and asymmetrical corridor
of overnight interest rate
unrelated to discount rate
results in
 avoiding inter bank shock;
 avoiding unreasonable
expenses of mobilization
operations
Thank you for attention