The Ministry of Finance decided not to change the interest rates on military bills, and borrowed only UAH810m (US$27m) for the budget yesterday.
Demand for UAH military securities fell almost threefold compared with last week, both in face value and the number of bids. Most auction participants bought semi-annual bills, which provided the budget with almost UAH765m (US$26m), but this was less than half what was raised last week. And the number of bids submitted for this paper declined from 40 to 12. The number of bids at yesterday's auction fell from 140 last week to 40.
The NBU’s decision to raise the key policy rate sharply by 1,500bp up to 25% came as a surprise to the Ministry of Finance. Yesterday's auction, which the Ministry announced at fixed rates, unchanged from the previous auctions, showed the unwillingness of banks and other investors to accept such conditions.
As the next large bond redemption will be next week, the Ministry of Finance may try to keep interest rates at the previous level and refinance part of this redemption at a low cost. But in the face of urgent need for funds for budget expenditures, we can soon expect a reboot of the domestic bond market to find new equilibrium rates acceptable to both investors and for the state budget.