The formation of credit policy: Bank of Ukraine

Reducing the discount rate in the long term can lead to a decrease in deposit and lending rates.

The formation of credit policy

Recession National Bank of Ukraine discount rate to 19% per annum is a positive signal to the banking market and in the long term can lead to a decrease in deposit and lending rates.

National Bank of Ukraine
National Bank of Ukraine

Since the discount rate is important, but not the main factor in the formation of the credit policy of the Ukrainian banks should not be expected that it will decrease immediately to a massive increase in the credit market in the country. However, in general, the market regulator force to reduce interest rates permit banks to engage resources away from the overpriced and after the National Bank more actively reduce interest rates on deposits, which will start lowering interest rates.

Future market revival

Mass revival lending market in Ukraine – is not a question today, since the reduction in the discount rate of 3% will not lead to an abrupt decline in deposit rates. Moreover, a high proportion of bad assets in the whole system are a deterrent to the renewal of full-scale lending in the country to pre-crisis level, although banks gradually begin to increase activity in this direction.

Assuming that does not happen in the future internal and external social and economic upheavals and Ukraine will resume collaboration with international donors, as well as be able to implement plans to reduce inflation by the end of 2016 the base rate may be reduced to 12-13%, which may push banks lending to a full recovery.

Changes in interest rates

Instant impact on the pricing of loans change in interest rates will not. National Bank gives a positive signal to the market, while maintaining a concerning high key money market rates. Since the base funding of loans generated and remeasured by banks for an extended period, taking into account the financial risks, only a stable downward tendency in interest rates on the implements in the interbank market, the reduction of inflation and devaluation expectations with a certain time lag will affect the cost of funds for commercial banks on other funding sources and credit costs.

Whereas the substantial amount of two-week certificates of deposit, which are already purchased by banks, each following a significant change in the discount rate will have a direct impact on the cost of resources. In case of further reduction in interest rates will be formed with the flow of liquidity National Bank certificates of deposit, which will reduce the rate on the interbank and deposit markets, and in the long term while reducing risks to promote bank lending and public consumption.