Fixed exchange rate currently more advantageous than other modes - National Bank of Ukraine

KYIV. May 18 (Interfax-Ukraine) - In choosing between ways to regulate the foreign exchange rate, the National Bank of Ukraine (NBU) decides which of them is more suitable at a given moment to attain an inflation target, maintain macroeconomic balance, and ensure competitiveness of local manufacturers, NBU Deputy Governor Serhiy Nikolaichuk said.

"We are seeing more advantages from a fixed exchange rate than from other modes. If the situation changes, we'll review our exchange rate policy. However, we see such steps as unreasonable right now," Nikolaichuk told journalists in Kyiv on Wednesday.

The NBU might review the exchange rate policy depending on what macroeconomic scenario the country decides to pursue, he said.

"As to how long we're going to keep a fixed rate, the answer is very simple: as long as we see that the advantages of this fixation outweigh the flaws of this exchange policy," he said.

While the NBU would like to return to a flexible floating exchange rate one day, this is not an end in itself and requires certain preconditions, among them a more self-balanced forex market, he said.

"We should also normalize the functioning of the monetary transmission mechanism, because liberalizing the exchange rate without being able to influence it with the interest rate wouldn't be a prudent enough decision," Nikolaichuk said.

Speaking of a controlled return to a flexible exchange rate, it should be borne in mind that this rate should not see significant corrections this way or the other, he said.

"If we have to correct the exchange rate, our approach will depend on the conditions in which we will make these steps," he said.

Major but rare steps are actually a sign of attempts to level out misbalances prompted by significantly more expensive imports, when the system is not yet ready to return to a floating rate and therefore requires a new fixed rate, he said.

"Smaller but more frequent steps are more reasonable in a situation when the market is almost but not quite ready for a floating exchange rate. Hence, the Central Bank will be trying to find a new equilibrium in this situation, where the market will balance itself. And then the rate will be floating in pre-crisis mode," he said.

As reported earlier, the NBU on February 24 suspended the work of Ukraine's forex market except for sale and fixed the rate at the official level of 29.2549 hryvni/$1 as of that date, which prompted the emergence of a black market of foreign cash, where the rate reached 39-40 hryvni/$1 within the next few days. The regulator later allowed some financial institutions to sell forex at the decision of their management.

The NBU made the next step to liberalize the forex market on April 15, when it allowed banks and non-banking financial institutions to sell foreign cash at a rate higher than the official rate by no more than 10% within the limits of forex it purchased. As a result, numerous banks offered foreign cash at the highest possible rate of 32.17-32.18 hryvni/$1 and at the same time raised the buying rate closer to the selling rate.

According to market players, it is still extremely difficult to buy foreign cash officially in Ukraine. Nevertheless, the black market reacted by slightly strengthening the hryvnia, with the dollar rate being higher on it by only about 2%. However, this difference has reached nearly 10% since late April. On Wednesday, the exchange rate on the black market was 35.0-35.5 hryvni/$1.