Why does it exist a discount rate of the National Bank? How will its reduction affect Ukrainians?

Why does it exist a discount rate of the National Bank? How will its reduction affect Ukrainians?

The media talk the National Bank of Ukraine soften the monetary policies in the country to support economic growth. The National Bank reduces the discount rate. It has a significant impact on deposits, loans, mortgages, hryvnia exchange rate and inflation. These topics concern everyone in our country.

Why does the discount rate affect the life of every Ukrainian?

The National Bank lowers the discount rate to 6% per annum from June 12 of 2020. Such an indicator has never been throughout the history of independent Ukraine. It is important to note this figure was at levels of 11% in early February, decreased to 10% in March and to 8% in April.

The discount rate is so important because the interest rate on loans and deposits depends on it. The National Bank issues loans to commercial banks with this percentage. The commercial banks apply their own interest and lend money to individuals and legal entities in Ukraine then.

Due to this fact Ukrainians get the opportunity to take loans for lower percentages. But the decline of the main economic figure has a negative impact on deposits. The lower the discount rate of the National Bank the lower the income of citizens from investing money in deposits. When the discount rate is high it is good to invest in deposits. But when the rate is low it is a good time to take loans. It helps to stimulate the economy.

The discount rate affects the hryvnia exchange rate in a part. Because the yield on bonds of domestic loans focus on the rate of the National Bank. When the percentage decreases from the YBDL the number of investors may decreases. It will negatively affects the hryvnia exchange rate. The low discount rate signals the development and stability of the economic model.

What should be the discount rate?

The inflation rate is low at a high interest rate and the rate of inflation is accelerating at a low interest rate. But the inflation is not too bad. The economic development slows down at low inflation. The normal level is 2-4 percent and the Ukraine’s inflation rate was 4.1% in 2019. It was the best result for the last 6 years. The discount rate was 30% in 2015. Such a high figure was set by the National Bank to restrain high inflation. The figure is 6% now. It is still very high figure compared to Europeans and the United States. For example this figure is 0.25% in the European Union and it is 0-0.25% in the US. Now the majority countries in the context of the global pandemic are lowering discount rates to stimulate economies and to get out of the financial crisis faster.

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