NBU Board has approved a decision to reduce the bank’s discount rate by 2% to 8%
annual, informed NBU Governor Yakiv Smoliy. The decision enters into force April
24, 2020.

As has become customary, Smoliy explained the decision to reduce the discount rate
by the current situation with the official inflation rate: it was low in March at 2.3%.
Needless to say, it does not take into account the price hike observed at the retail
chains since the introduction of the quarantine in Ukraine at the peak of the
demand increase for commodities. The people bought up products in advance in
order not to leave their homes often, as the government requested, and to minimize
the chances of contracting COVID-19.

The reports of the State Statistics Service and the National Bank of Ukraine have
long become detached from the reality.

Meanwhile, the significance of the discount rate has recently amplified. It shows the
cost of the hryvnia supply. The NBU is currently trying to reduce it as much as
possible in order to issue its refinancing loans to the banks at cheaper rates, as the
demand for them is stable, primarily due to the deterioration of the situation with
repayment of loans: the majority of the companies are forced to stand idle due to
the quarantine, with the people not getting their salaries. Which is why the
companies simply cannot make payments on their loans.

To fill the gaps in their balances, the banks are forced to regularly ask the NBU not
only for short-term refinancing (overnight), but also loans for the term of 28 days:
on April 17, such loans were issued for 7 banks in the total amount of UAH 963.2
million; on April 13 – for 3 financial institutions in the amount of UAH 260 million.
This, however, is not the most important issue here. The key is that the NBU and the
Finance Ministry need the reduction of the discount rate and increase in the
volumes of refinancing to patch the holes in the budget; to carry out active hryvnia
emission through the NBU and state-owned banks. The National Bank will issue
refinancing loans to the state-owned banks, while the latter, in turn, will acquire
government bonds. The more government bonds are sold, the more new hryvnia will
be printed.

It is commonly known that hryvnia emission gives two things – increase of prices at
stores and escalation of real inflation, not the official index that