NBU relaxes bank reservation requirements

Макроэкономика 21.05.2014 The National Bank of Ukraine (NBU) will reduce from 50% to 40% the level of compulsory reserves that banks should deposit daily at the NBU account. The new regulation will be valid from May 31. The NBU officials believe this step will add up to UAH 4.0 bln extra liquidity to the banking system. Alexander Paraschiy: This step is in line with the IMF requirements on moving from over-tightened daily reservation norms to more relaxed monthly criteria. No doubt, in the context of devaluation pressure, such step is quite risky. Though, as we see it, the NBU is quite determined to start operating with monetary tools only, leaving the hryvnia to float freely whatever happens. In our opinion, the bank is acting correctly by ignoring risks of further hryvnia rate volatility. In fact, from external trade statistics we see that the foreign currency deficit is shrinking fast and at some stage will switch to a surplus, especially after more funds arrive in the country. Against this backdrop it looks like only nervousness concerning the east and a foreign currency deposits outflow are the key reasons for devaluation pressure. In other words, as soon as tension in the east eases we anticipate the hryvnia will strengthen to a balanced level (UAH 10.5 per USD, we estimate). In this context, we believe, there is nothing wrong in the cautious steps of the NBU on relaxing monetary policy.