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Saturday, April 4, 2020

NBU to consider inflation in calculation of discount rate over next year

Governor of the National Bank of Ukraine (NBU) Valeria Gontareva said on Friday that when determining the discount rate, the NBU will take into account the projected rate of inflation for the next year.

"The National Bank of Ukraine intends to adopt an inflation targeting regime and we are taking the first steps down this path," Gontareva said at a press conference, according to a press release. "We should look ahead. We should not set the discount rate at levels consistent with the rate of inflation recorded last year. When setting the discount rate, we should anticipate future inflation developments. Eventually, the discount rate starts to play some role."

Gontareva said that previous means of determining the discount rate and the rates on refinance loans did not work.

"We will draw a yield curve by plotting the time to maturity (from an overnight maturity to a maturity of up to 90 days) that will be linked to the discount rate for both certificates of deposit and refinancing over this period," Gontareva said. "Financial instruments with a maturity of over 90 days will form part of a liquid domestic sovereign bond market that the National Bank of Ukraine, together with the Ministry of Finance of Ukraine, would develop. This year's task is to make financial instruments with a maturity of up to one year highly liquid and financial instruments with a maturity of up to three years sufficiently liquid, and draw an actual yield curve that plots corresponding maturities."

Gontareva also said that a liquid domestic sovereign bond market will pave the way for the development of the capital markets.

"Our top priority is to develop a fully liquid domestic sovereign bond market," Gontareva said. "Upon achieving this goal, we will focus our efforts on developing other segments of the stock market."