Lowering the Discount Rate Will Speed up the Economy without Increasing Inflation. Ukraine’s Economy is a Car Running on a Handbrake

Abstract

The public was misled by the National Bank that the main tool for managing inflation is the discount rate. In fact, the most important factor is the money supply, and the discount rate plays an auxiliary role in fine-tuning inflation relative to the level established under the influence of the money supply. A false exaggeration of the ability of the discount rate to influence prices regardless of the behavior of money has led to the fact that attempts to achieve target inflation by raising the rate are neutralized by the more powerful action of the money supply. On the other hand, simultaneously with the failure to curb inflation, side negative effects of the rate, such as overestimation of the cost of lending to the economy, were “successfully” achieved. At the same time, the very principle of the NBU to keep the interest rate no lower than inflation caused serious questions from international experts. At the same time, this does not mean the basic inability of the discount rate to influence prices, but it means that the condition for the launch of the “inflationary” function of the rate is the preliminary approximate achievement of the target inflation with the help of the main instrument – the money supply. And while the fluctuations of the emission and money supply have not yet subsided, and the necessary monetary background has not yet been created, it is quite possible to reduce the rate without consequences for inflation. The main thing is to overcome the stereotype of the irresponsibility of reducing the interest rate and come to the revelation that the discount rate does not dictate, but prepares inflation dictated by money. Specifically, the reduction of the rate from 25 percent to zero is justified. This analysis can be used to complement the Ten Steps proposed by Yu. Svyridenko in the article “What kind of economy are we building?” (URL: https://www.pravda. com.ua/columns/2022/07/8/7357 131/). It is proposed that the clause on “increasing lending by Ukrainian banks on the basis of state guarantees” should be expanded with the following paragraph: “Before this measure, increase crediting by Ukrainian banks by abandoning the erroneous version of the inflation targeting policy adopted in Ukraine, and returning to the NBU discount rate its main role of influencing the cost of commercial banks’ loans in such a way as to contribute not to the decline, but to the flourishing of the economy. To do this, move from the current discount rate of 25% to a rate close to zero. This will help reduce the cost of loans, increase credit resources, and increase the share of bank loans in the sources of financing capital investments.” And this can also be considered as a publication in continuation of the international discussion “The post-war reform plan: is there an opportunity for a civilizational leap?” conducted based on the materials of the abovementioned article by Yu. Svyridenko.