Central Bank Makes Leap of Faith for Money Market

Ukraine's central bank, the National Bank of Ukraine (NBU), recently made a significant move to alter the banking sector's liquidity management. On July 30, the NBU announced that banks could no longer deposit all their excess liquidity in three-month deposit certificates; instead, they must now negotiate rates. The NBU introduced this policy after the previous wartime interest rate hike failed to effectively raise deposit rates.

Since 2023, banks have been using three-month deposit certificates to place their liquidity tied to their existing household deposit portfolios, multiplied by a coefficient of 3.0 for any growth since April 2023. The NBU believes this strategy will encourage Ukrainians to keep their savings in hryvnia and prevent them from fleeing into foreign currencies. However, critics argue that the NBU overpaid banks and should have redirected this liquidity to loans instead.

The NBU's primary concern is to maintain public confidence in the hryvnia and ensure the stability of Ukraine's money market, especially as reconstruction capital flows in post-war. They also aim to develop a holding for future capital-market infrastructure, which will ultimately lead to the creation of reliable market benchmarks, including yield curves, interest rates, and currency derivatives.

However, the NBU's new policy has already started to impact banks' profitability, as they now have to seek alternative liquidity sources outside of the NBU certificates of deposit. The first interest-rate tender held by the NBU on August 7 saw the average rate drop to 18.71%, even as the central bank had just raised its key rate by 0.5 percentage points.

This trend continued with the second tender on August 21, which pushed the rate down to 18.59%. As a result, bank profitability on these risk-free placements is gradually shrinking.