In compliance with Article 13 of the Law of Ukraine On the National Bank of Ukraine, the Decision of the NBU Council (hereinafter - the Council) On Fulfillment of Monetary Policy Fundamentals in 2014 and Influence of Monetary Policy on Ukraine's Social and Economic Development No. 30 of December 17, 2014 as approved by the Board has been disclosed on the official web-site of the National Bank of Ukraine.
The National Bank of Ukraine notes, that the Decision does not take into account drastic changes in macroeconomic situation and their influence on monetary policy implementation. Under such circumstances, support of banking sector to avoid default crisis and ensure fulfillment of obligations to banks’ depositors in due time became one of the National Bank priorities. At the same time, this support was sustainable and moderate. With the outflow of households’ deposits totaling UAH 124 billion (without exchange rate adjustments), the balance of refinancing loans to banks has increased by some UAH 34 billion since the beginning of the year.
However, the inflation ratio was not critical in the circumstances the Ukrainian economy faced and made 21.8% y-o-y in November, while the benchmark provided for in the Monetary Policy Fundamentals was 19.0%. Administratively regulated tariffs for natural gas increased by 62.8%, for hot water and heating - by 42.8%.
As a result of accumulated external and internal imbalances in the economy in 2013, BoP current account deficit made 9.0% of GDP, while unfavorable macroeconomic trends preserved also in 2014 against a background of social and political tension in the country. Since May this year, situation in the economy showed significant deterioration due to active military actions in the East of Ukraine and growing animosity between Ukraine and the Russian Federation. Under such conditions hryvnia depreciation has been a natural response of the economy, which enabled to narrow earlier accumulated macroeconomic imbalances.
Maladjustment of state finances and slow reforms in Naftogas NJSCS that was unable to fulfill its obligations on time produced significant pressure on stability of the monetary unit. The National Bank of Ukraine's support of liquidity in the market of governmnet securities created conditions for timely financing of state budget deficit, as well as fulfillment of obligations of Naftogas NJSCS under agreements on import of natural gas. Failure to undertake such measures would have resulted in economic collapse and social turmoil. That is why the National Bank of Ukraine increased two times its portfolio of domestic sovereign bonds in the current year. Currently, the portfolio makes UAH 297 billion. The National Bank of Ukraine has also transferred UAH 22.8 billion of its profit to the state budget. All the above helped Government to finance its expenditures in the amount making about 40% of income in the overall budget of Ukrainebecause during military actions it was impossible to find other financing sources.
Depositors’ panic became the main destabilizing factor in FX and money markets. The National Bank of Ukraine sustained banking system in the circumstances of households’ deposits outflow in both hryvnia (in the amount of UAH 54 billion) and foreign currency (USD 8.8 billion) in order to preserve viability of banking system. The Council’s Decision No 27 of September 11, 2014 gives the National Bank recommendations to support banking system stability, which is a necessary condition for effective fulfillment by the National Bank of its main constitutional function of ensuring the Ukrainian currency stability.
The National Bank shares the opinion of the Council that implementation of monetary policy within this framework and under such macroeconomic conditions poses risks for achieving its priority objective - support of price stability in the country, with achievement and maintenance of stable inflation rates in mid-term as its major criterion, and that it is necessary to create conditions for moving to inflation targeting regime. However, balanced fiscal policy should precede. Therefore, the National Bank of Ukraine hopes for the Council’s criticism to be taken into account by the Cabinet of Ministers of Ukraine and Verkhovna Rada of Ukraine while drafting and approving the State Budget of Ukraine for 2015.
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