Ukraine's national bank to switch to 'managed flexibility' of hryvnia/dollar exchange rate as of Oct 3
MOSCOW. Oct 3 (Interfax) - Having maintained the official hryvnia/dollar exchange rate at UAH36.57/$1 since the end of July 2022, the National Bank of Ukraine (NBU) plans to switch to "managed flexibility" of the exchange rate beginning on October 3, Ukrainian media reported, citing the NBU's post on social media.
"Within this framework, the official rate will be based on the transaction rate on the interbank market, and the National Bank will not set the rate prescriptively as per NBU executive board resolution No. 18, as has been the case since February 24, 2022," the NBU said.
The NBU indicated that by offsetting the structural deficit, the exchange rate on the interbank market could rise and fall according to changes in supply and demand on the forex market.
"Moreover, the National Bank plans to limit exchange rate fluctuations substantially by preventing both significant weakening in the hryvnia and substantial strengthening," the regulator emphasized.
The NBU said it is able to move to "managed flexibility" for the exchange rate thanks to steady progress made in reducing inflation, the accumulation of a significant level of international reserves, and the increase in the attractiveness of hryvnia deposits and domestic government bonds.
"The NBU will continue to monitor the situation on the FX market and will remain a key player in it, compensating for the structural deficit of foreign currency," the statement said.
The NBU expects the "new regime will strengthen the resilience of the Ukrainian economy and FX market, promote their better adaptation to domestic and external shocks, and reduce the risks of accumulating FX imbalances that can be generated by a long-term maintenance of the exchange rate peg."
The official exchange rate under managed flexibility will be determined by transactions on the interbank FX market, but the exchange rate in the cash FX market, where individuals can buy and sell foreign currency, will be set according to the same rules as before, the NBU said.
"This market has been operating in such a mode for nearly a year and a half now, during which the cash exchange rate has gone both up and down significantly. The NBU will continue to make efforts to promote the proper operation of the cash FX market, in particular by minimizing the difference between the cash and official exchange rates," the statement said.
The NBU said maintaining the stability of the exchange rate will continue to be one of its priorities. This is important for further slowing inflation and bringing it down to 5% in the medium term.
The NBU said its monetary policy will ensure the sufficient attractiveness of hryvnia- denominated instruments, which will help households protect their hryvnia savings from losing value. Despite the easing cycle, the yield on hryvnia retail term deposits and domestic government bonds will stay attractive given the expected deceleration of inflation, and this approach will reduce the demand for foreign currency and help ensure exchange rate sustainability and a further easing of inflation, the NBU said.
It recalled that the shift to managed flexibility of the exchange rate is a step in the implementation of the Strategy for Easing FX Restrictions, Transitioning to Greater Flexibility of the Exchange Rate and Returning to Inflation Targeting.
The NBU said it has the ability to ease a number of restrictions to meet demand in the cash FX market and to expand the supply of both cashless and cash foreign currency to the public.
In making the decision to transition to managed exchange rate flexibility, the NBU said it took into account that inflation has been declining steadily, slowing to 8.6% from 26.6% in the first eight months of 2023, and exchange-rate and inflation expectations of different groups of respondents have improved significantly.
"The NBU has additional tools to ensure such sustainability going forward. Ukraine's international reserves have consistently remained at a sufficiently high level [over $40 billion as of September 1], enhancing the NBU's capacity to maintain the sustainability of the exchange rate," the statement said.
The NBU also said it "has made tangible progress in ensuring attractive interest rates on hryvnia-denominated instruments." Interest rates on term deposits in the system have been close to 15%, "making it possible to cover both expected inflation and the anticipated change in the exchange rate, according to different surveys," and the banking system continues to operate stably.
"Managed flexibility of the exchange rate will be an additional mechanism through which the economy can adjust to changes in the domestic and external environment, as well as an important prerequisite for a return to inflation targeting going forward," the NBU said.
Long-term fixing of the exchange rate, in contrast, could lead to an accumulation of risks for the economy and the financial system, it said.
"Going forward, the flexibility of the FX market will gradually strengthen as relevant conditions are met, helping mitigate shocks to the FX market and the economy. A gradual increase in exchange-rate flexibility will put the NBU in a position to press forward gradually with the second stage of the relaxation of FX restrictions," the NBU said.
