Outcome of the meeting on monetary issues
Governor of the National Bank of Ukraine Sergiy Arbuzov held a regular meeting on monetary issues, which was attended by First Deputy Governor of the National Bank of Ukraine Yurii Kolobov, Deputy Governor of the National Bank of Ukraine Ihor Sorkin, and senior employees of the structural units whose functions include implementing the monetary policy.
During the meeting attention was drawn to the positive trends seen in the macroeconomic environment. In particular, real GDP in the third quarter of 2011 grew by 6.6%, compared with the corresponding period of the previous year. In January-October 2011, industrial output climbed by 8.2% versus the corresponding period of 2010. With investment in fixed assets having climbed by 21.2% in the first 9 months of 2011, increased investment activity laid the foundation for economic growth.
Following the deterioration of the Balance of Payments recorded in September, which was triggered by instability in the European markets, the state of the Balance of Payments is gradually improving. The consolidated balance of payments showed a deficit of USD 1.6 billion in October, compared with USD 2 billion in September. According to preliminary estimates, the deficit declined to USD 0.8 – 0.9 billion in November.
Positive trends continue to prevail in inflation dynamics, being a key priority of the National Bank of Ukraine. In particular, November 2011 saw a decrease in the year-on-year CPI growth to 5.2% versus 5.4% in October, 11.9% – in June 2011 and 9.1% – according to the year-end results.
From the start of 2011, consumer price growth stood at 4.4%, compared with its increase of 8.2% in the corresponding period of the previous year. The inflation indicator over the first 11 months of 2011 is the lowest figure ever recorded in the history of Ukraine’s independence, except for the same period of 2002, in which the annual deflation was recorded.
In line with the NBU experts’ expectations, the annual CPI inflation rate will be much lower than the projected figure for 2011 published in the official inflation forecast, which stands at 8.9%. Much lower rates of inflation, compared with projections of CPI inflation, saved a considerable amount of households' real disposable income, preserved the value of households' savings, had a positive impact on the real effective exchange rate dynamics and laid the foundation for further positive developments in the macroeconomic sphere and in the financial market.
According to the meeting participants, the above-mentioned results were achieved owing to the joint, coordinated efforts by the National Bank of Ukraine and Government. In particular, the monetary policy pursued by the National Bank of Ukraine played a significant role in maintaining macroeconomic and price stability. The rigid monetary policy contributed to the maintenance of overall equilibrium in the market and reduced negative expectations triggered by instability and uncertainty in the European markets.
The impact of this policy is reflected in a gradual improvement in the external financial soundness indicators and domestic market conditions. Thus, in the external markets we have recently seen a fall in the cost of insuring against default on Ukraine's 5-year sovereign debt (CDS), the strengthening of UAH/USD exchange rate under foreign currency agreements in the international markets (NDF); a decline in the yield on external debt liabilities of Ukraine, as well as an improvement of other similar indicators.
There is a steady net inflow of foreign exchange from non-residents in the domestic market, which has exceeded USD 14 billion in the first 11 months of 2011 (including USD 2.2 billion in November). The average daily demand for cash foreign exchange declined from USD 95.6 million in September to USD 62.3 million in November.
The introduction of new money market instruments (NBU certificates of deposit intended for the population, investment coins, switching to Russian rubles in payments for natural gas, etc.) will contribute to a further decline in the net demand for foreign exchange in both cash and non-cash segments, which is expected in the near future.
When pursuing a rigid monetary policy, the National Bank of Ukraine carries out an appropriate monitoring of the liquidity of the banking system in order achieve and maintain price stability, ensure maximum consistency between fulfilling this task and the requirement to support the economic development process. Taking into account the fact that a considerable amount of liquid funds was accumulated on the single treasury account in November, the National Bank of Ukraine took measures to provide liquidity support to banks.
In November there was an increase in refinancing loans extended by the central bank to banks, operations on purchase of government securities and direct Repo transactions were performed. Since December 2011 flexible liquidity management facilities for banks have been enhanced as banks have been allowed to hold a certain amount of required reserves on a correspondent account with the National Bank of Ukraine. When assessing banks' liquidity, a considerable amount of foreign exchange holdings on bank accounts should be taken into account as a portion of these holdings could be converted into hryvnias if required.
At the same time, the meeting participants drew attention to considerable risks which could potentially have an adverse impact on current macroeconomic and monetary trends. The major risks are concentrated around uncertainty over the development of European markets, increases in prices for foodstuffs in Ukraine's trading partners (Russia, Kazakhstan), uncertain economic expectations of economic entities, etc. The outcome of negotiations with Russia on introducing changes to terms and conditions for the import of natural gas will have a considerable influence on further macroeconomic prospects.
In view of the above, the meeting participants came to the conclusion that it would be inexpedient to introduce significant amendments to the monetary policy and alter the main parameters for monetary mechanisms and tools. In addition, the Governor of the National Bank of Ukraine drew attention of senior managers of the appropriate departments to the need to accelerate the implementation of new money market instruments and instructed the NBU officials to ensure a close coordination between the efforts of the National Bank of Ukraine and Government with regard to the development of the market of long-term resources, a continuation of cooperation with the IMF, counteraction to the dollarization of the economy, and other topical issues.