Following an ongoing decline, domestic liquidity (without UAH government bonds in financial institutions' portfolios) reversed. As of Thursday morning, the volume of reserve money and CDs in the NBU rose 1.5%, up UAH1.3bn to UAH94bn from the previous day. In a new development, autonomous non-monetary operations drove the rise despite the conversion of reserves into cash for clients. Banks increased investments in both ON and 14-day CDs.
Through CD placements to commercials banks, the NBU absorbed UAH0.46bn of ON instruments at 10.5% and UAH2.8bn in 14-day CDs at 12.5%. The total effect of NBU monetary operations absorbing reserves from bank's accounts amounted to UAH3.3bn. This appeared to be a defensive move against increasing of reserve money in banks' accounts with the NBU through Treasury operations of UAH2.1bn. The conversion of reserves into cash currency was UAH0.88bn. Overall, autonomous non-monetary operation surplus was UAH1.35bn versus NBU monetary operations of negative UAH3.3bn. Thus, commercial bank's correspondent accounts with the NBU declined UAH1.93bn. The interbank ON rate index rose 29 bp to 10.84%, indicating that the market rate is in line with the NBU's expected 10.5-125% range, a favorable sign of market health.
Investment implications: Following the ongoing decline on liquidity, it increased (excluding government bonds) due to Treasury operations. Considering the government's budget surplus in 1H17, the second half will show a deficit, which turns Treasury operations from absorbing reserves from banks' accounts to replenishment and increasing. Going forward, NBU monetary operations will aim to absorb reserves from bank's accounts. With little potential of lowering NBU CD rates, and with current inflation having grown over the last three months, the NBU will be cautious about decreasing its key policy rate.
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