Speech by NBU Governor Andriy Pyshnyy at Workshop on Monetary Policy in Emerging Markets

Dear colleagues,
I am pleased to welcome you to a workshop dedicated to monetary policy in EMs.
This event convenes leading experts from central banks, international financial institutions, and think tanks on an annual basis.
As professionals, this year we will once again have the chance to discuss the most pressing challenges and to articulate policy responses that we can use to meet these challenges going forward.
The workshop’s topic is extremely relevant and at the same time complex: crafting integrated and consolidated solutions.
We need to learn how not only to respond in a quality-oriented manner to rapidly changing conditions, but also to manage them effectively.
Today’s world is not what it was a few years ago.
Tomorrow it will probably change again.
But this doesn’t relieve us of our duty to pursue our mandate.
On the contrary, its fulfillment is becoming increasingly important amid a growing need for central banks to reduce uncertainty. 
The russian invasion of Ukraine was a turning point that got this new reality started.
Not only did the full-scale war pose a tremendous challenge to our country, but also it triggered tectonic shifts in the global socio-economic landscape.
The fallout from russia’s aggression reverberates far beyond Ukraine: global supply chain disruptions, energy crises, sanctions policies, and significant uncertainty are what shape the new economic normal.
For Ukraine, the war is also a challenge that compels us to make fast, bold decisions.
I have repeatedly said that no textbook in the world can answer the question, “How to conduct monetary policy if your country is being attacked by a state with a much larger economy?” As a matter of fact, we are writing such a textbook right now by taking action to counteract inflationary and depreciation pressures in the face of subdued investment activity, unprecedented migration, and structural changes in the economy as the war grinds on.
Meanwhile, all countries are facing the challenges and consequences of uncertainty one way or another, and EMs are no exception.
The task of striking a balance between short-term emergency measures and strategic goals is therefore relevant to all of us.
The purpose of our workshop is to discuss integrated solutions that can deal with the complex nature of modern challenges.

And so let me start out by outlining three key challenges facing central banks.
The first is heightened uncertainty.
The russian war against Ukraine, the unstable geopolitical situation, and global economic shocks are fueling sharp energy price fluctuations, supply chain disruptions, FX market pressures, and significant capital mobility.
All of this requires that central banks both respond effectively and think strategically.
The second key challenge is pressure on financial systems.
That includes a growing debt burden, increased risks to the banking system, and capital outflows.
Those are the main threats to EMs.
Monetary policy should therefore continue to be flexible but consistently aimed at retaining its credibility with businesses and households.
The third key challenge is the limited effectiveness of conventional policy instruments.
Our traditional approaches to policy implementation cannot adequately meet today’s unprecedented challenges.
Strong supply-side shocks expose this deficiency of monetary policy when they materialize, because its capacity to affect them is limited.
In this regard, EMs are particularly dependent on policies pursued by developed countries.
Which raises even greater obstacles to conducting effective independent monetary policy to ensure macroeconomic and financial stability.
How should we respond to these challenges?
We at the NBU have no universal recipe for that.
But we do have something to share.
I will outline the contours of the stages through which Ukraine’s monetary policy has gone amid the full-scale war.
I hope they add an important element to the discussions and inspire you.
In the earliest months of russia’s full-scale invasion, the NBU was forced to take tough anti-crisis measures.
Those included an exchange rate peg, FX restrictions, and financing the government – all for the sake of minimizing panic and keeping the economy afloat.
The NBU quickly realized, however, that such steps fell short of being a sustainable, long-term solution.
So, as soon as the right prerequisites were in place, the NBU began to move back towards a more balanced and predictable policy.
First, we introduced a set of measures to enhance the impact of the key policy rate by modifying reserve requirements and the operational design of interest rate policy.
When more prerequisites were met, we switched to managed flexibility of the exchange rate.
And in 2024, we finally managed to introduce flexible inflation targeting, an intermediate monetary regime.
Under this approach, the NBU pursues a policy that steers inflation to a point target of 5% within an extended policy horizon of up to three years.
Inflation targeting reduces uncertainty, while flexibility allows for taking current economic conditions into account, including structural shocks caused by the war.
Flexible inflation targeting comes with distinct features.
First, we maintain a focus on long-term goals.
Even in crisis conditions, we adhere to inflation benchmarks, laying the groundwork for a gradual return to full-fledged inflation targeting.
Second, our monetary policy is adjusting to current conditions.
Under the transitional regime, we have a broader monetary policy horizon.
This allows us to quickly adapt and respond to new shocks, such as energy crises or supply chain disruptions.
Third, flexible inflation targeting involves a combination of instruments.
Apart from interest rate policy, we maintain an active presence in the FX market and place caps on capital movements.
As the right prerequisites emerge, however, we continue to move towards more market-based mechanisms.
This aspect will be given special attention today, because this combination of policy instruments is not unique to Ukraine and is increasingly being used by other small open economies.
Actually, finding an effective balance between instruments, in particular those based on advanced macroeconomic analysis, is the main task of this workshop.
The fourth important feature of the flexible monetary regime is a high level of interaction between fiscal and monetary authorities.
The NBU cooperates closely with the government, including to raise external financing and implement reforms in Ukraine.
At the same time, such cooperation implies that all authorities must respect each other’s mandates.
And the fifth feature is that the NBU remains transparent and actively in touch with every target audience.
We openly explain our decisions to avoid misleading the market’s participants, experts, government officials, investors, and the public.
We do it to maintain their trust – the primary anchor for effective policy.
Through this approach, Ukraine has been able to retain macrofinancial stability while setting the stage for economic recovery, despite massive challenges.
In addition to internal transformation, an important component of resilience is thorough cooperation with international partners.

For Ukraine, cooperation has become an integral element of macrofinancial stability.
And at this point I’d like to reiterate our gratitude to our partners for the expert, financial, military, and humanitarian assistance they have provided.
We are thankful for increased sanctions pressure and further progress in providing Ukraine with funds from frozen russian assets. 
Unprecedented support from the International Monetary Fund, the World Bank, the European Union, and the United States has enabled Ukraine not only to confront the war’s consequences, but also to look ahead and plan for long-term recovery.
Meanwhile, it’s more than 1,000 days since full-scale war started.
Today marks the 1,015th day of it, and the support I’ve mentioned is truly invaluable. 
We are also actively exchanging experience with colleagues from other countries, including as part of events such as this workshop.
Our track record shows that sharing knowledge is also a powerful resource.
In the first hours of the full-scale invasion and further on, the NBU received overwhelming support from central banks and international organizations and institutions.
We have taken full advantage of this help.
And now that we are on the path to recovery, we are excited to share our expertise with you while continuing to refine our approaches.
Although the challenges that you and we face may differ, we all share a common goal – to create a sustainable economy capable of ensuring the confident development of countries.

And I believe that integrated approaches, exchange of experience, and international cooperation are key elements of success.
Today we will have the chance to learn about cutting-edge research into topics such as FX interventions, capital controls, international reserves, and the interaction between fiscal and monetary policies.
We will be honored to hear a report from leading IMF economists Jesper Linde and Marcin Kolasa on the Integrated Policy Framework.
I am confident that their presentation will set the foundation for fruitful discussions on the practical aspects of the integrated approach.
Another highlight of today’s workshop will be the IMF’s extended Quarterly Projection Model (QPM).
Following the QPM presentation, we will hold a panel with leading industry experts, chaired by Natan Epstein of the IMF, about the specifics of implementing an integrated approach in our core macro models.
There is a great practical aspect in it for us, as we have been working closely with the IMF team to improve our own modeling toolkit.
I hope that today’s event will be a source of new ideas and solutions for all of us.
Thank you for your attention.
Have productive discussions!