Ukraine’s Monetary Policy Effectiveness Under War

Abstract

Introduction. Notwithstanding the Ukrainian banking system's resilience under war, there are devaluation and inflation pressures. In turn, monetary policy is found to be vital to combat drastic GDP decline and FX reserve depletion. Materials and methods. In an attempt to examine the effectiveness of the NBU's (National bank of Ukraine) monetary policy, the article employs comparative and statistical analysis of its instruments based on data regarding dynamics of key and other interest rates (deposits, loans, certificate of deposits, refinancing, DGBs), volumes of foreign exchange interventions and international reserves, DGBs. Results and discussion. This paper summarises the fundamental changes in monetary policy since the beginning of the full-scale war. The findings demonstrate a shift from the policy priority of inflation targeting and a freely floating exchange rate in favour of monetary financing of the budget deficit. At the same time, the devaluation of the national currency is restrained mainly at the expense of international credit and grant funds, which makes it possible to cover the losses of the NBU's FX reserves to support the exchange rate and carry out additional money issuance. The results show that under the war, the NBU's monetary policy is effective in limiting devaluation processes due to the timely introduction of a fixed exchange rate, strengthening of currency restrictions and their further adjustment. However, due to the increase in the discount rate and the corresponding increase in interest rates on certificates of deposit and refinancing and a slight increase in deposits, DGBs did not restrain inflation due to the lack of alternative monetary financing of the budget deficit. Further focus exclusively on the inflation targeting regime does not meet the current tasks of monetary policy and thereby reduces its effectiveness. The current budget dependence on monetary financing requires optimising monetary expansion measures in order to flow the issuing money from the military to the consumer market. Conclusions. The effectiveness of inflation targeting with limited monetary policy transmission indicates that the NBU should focus on other goals equally crucial to maintaining price stability, such as limiting exchange rate fluctuations and monetary financing for economic growth. In post-war recovery, the monetary policy direction solely on inflation targeting will remain inappropriate, given the mainly non-monetary factors of inflation.