The NBU lowered the discount rate: what will happen now?

From September 15, 2023, the National Bank reduced its discount rate by 2% for the second time in a row - from 22% to 20% per annum (in August it was reduced from 25% to 22%). This was stated by NBU Chairman Andrey Pyshny.

“A further slowdown in inflation and the ability of the NBU to ensure exchange rate stability allow us to continue the cycle of rate cuts while maintaining sufficient attractiveness of hryvnia savings. Such a step will support economic recovery and at the same time does not create a threat to macro-financial stability,” said Andrey Pyshny.

He also said that by reducing the discount rate the regulator responded to a decrease in the inflation rate in Ukraine to 8.6% in August.

How did the hryvnia/dollar cash exchange rate react to today's reduction in the discount rate?

From September 7 to 14, the price of the dollar on sale rose from 38.02 UAH/$ to 38.21 UAH/$. They say that the market expected such a move by the NBU, and reacted in advance in anticipation.

But banks just today raised their average foreign exchange rates at cash desks by 10-20 kopecks - to 38.0-38.60 UAH/$. The maximum dollar rate jumped from 38.50 to 38.80 UAH/$, and it was set by Credit Agricole Bank.

On September 14, state banks set the following dollar purchase/sale rates:

37.70-38.60 UAH/$ - Oschadbank;

37.65-38.45 UAH/$ - Ukreximbank;

37.30-38.30 UAH/$ - Ukrgasbank;

37.70-38.20 UAH/$ - Sense Bank;

37.40-38.0 UAH/$ - Privatbank.

The relationship between the discount rate and the foreign exchange market is explained by expectations for a reduction in interest rates on household deposits. The lower the NBU registration, the less banks pay on deposits to the population. And the less the population earns on deposits, the more often people withdraw hryvnia from their accounts and buy dollars.