The discount rate is higher than business activity

The National Bank of Ukraine’s discount rate has been kept at a steady 9.5 percent for almost fourth months since Aug. 10, when it was last altered. But now NBU first deputy governor Anatoliy Shapovalov says that they are studying the possibility of increasing the rate again. In Shapovalov’s view, given that inflation has been running at 9.4 percent for 11 months, this step would be justified because “the difference between the banking rate and inflation is a mere 0.1 percent.” Still, Shapovalov is not 100 percent sure that this decision will be made. “Let’s not hurry: it is up to the NBU board to decide,” Ukraine’s No. 2 banker said.

Valeriy Lytvytsky, chief advisor to the NBU governor, told The Day that he recommended that the NBU board raise the rate, but he feels “this will not happen not only because this rate is of a largely token nature but also because the current dynamics of economic growth leave much to be desired.”

In all likelihood, presentiments never deceive such an experienced expert as Lytvytsky, and the NBU board will not rush to make changes that can have a tangible effect. The governor of the NBU, Volodymyr Stelmakh, is not only a talented economist and banker but also a very cautious politician. In his view, the National Bank, despite its independence, is subject to presidential control, while the chief executive always has to balance between two crucial economic criteria: the inflation rate and the growth rate of the Gross Domestic Product (GDP). A poet once asked, “Who is more precious to mother-history?” This country’s executive branch also has to address this problem every day. It seems to have opted for the GDP and thus made it clear that the NBU, which is responsible for combating inflation, should not raise its rate and thus impede business activity in this country.

This decision, economically correct as it is, does not seem to be in full compliance with the oaths of allegiance to “the little Ukrainian,” which sounded on the Maidan. Moreover, you could say that in a way this is a courageous decision because by all accounts the “little” voter does not care about GDP growth, which is not exactly going to burn a hole in his wallet. Instead, he knows only too well what inflation is when he goes to a food store or a market place — and this can really influence his political choice.

On the other hand, it is only economic growth that can promise rosy prospects for this country and its citizens. Clearly, there is no reason why the government should slow it down by boosting the discount rate unless they have taken leave of their senses on the eve of the elections. Lytvytsky also told The Day that raising the NBU rate would not greatly affect inflation figures for December and therefore the entire year. What this can really do is curb prices to some extent in the first quarter of 2006 — the quarter that usually muddies the inflation picture.

Although the National Bank has a rather limited set of instruments to influence the price situation, it can still do other things besides playing with discount rates. There was an almost identical situation late last year: with the elections coming up, the government had earmarked huge funds for social needs, and the country was facing a crisis in the first quarter. To avert it, the government resorted to a different mechanism — a revaluation of the hryvnia. Can the likely refusal to raise the discount rate mean that the authorities have opted for the same way, which also allows responding to inflation-related challenges? One way or another, next year this country is going to face sudden changes in the gas and public utilities market. According to governmental analysts, such a smooth or, to be more exact, market-oriented regulation as the discount rate hike may not work.

However, experts interviewed by The Day failed to confirm this hypothesis. Volodymyr Khlyvniuk, chairman of the board of the Finance and Credit Bank, noted that in reality there are ample grounds to suggest that the NBU will raise its discount rate. This is also the opinion of Viacheslav Yutkin, head of the NRB Ukraina Bank’s supervisory board. He believes that the need to raise the rate can be also viewed as a distress signal, contrary to official reports on continuing economic growth. Nevertheless, Yutkin does not think that the National Bank will opt for another revaluation of the hryvnia because this can seriously complicate things for exporters and stir up widespread discontent among ordinary Ukrainians, who continue to keep their savings in foreign currency.