Ukraine’s economy not yet ready to return to floating exchange rate - NBU

The economy is not yet ready to return to floating exchange rates, the National Bank reports.

According to the NBU press service, the conclusion was made by members of the Monetary Policy Committee, who discussed the level of the key rate adopted on June 1, 2022, Ukrinform reports.

According to the team, the Ukrainian economy is not yet ready to return to floating exchange rate formation. Appropriate macroeconomic preconditions must be created to this end. In particular, the ability of the foreign exchange market to self-balance should increase.

"Otherwise, the correction of the official exchange rate will only create unnecessary shocks for economic players, worsen expectations, change the scale of prices in the country by a certain percentage, but the pressure on the hryvnia and international reserves will remain in place," said members of the Monetary Committee.

The regulator recalled that, against the background of a gradual deterioration of inflation expectations, the real yield on instruments in the national currency, especially on deposits and domestic government bonds, is becoming increasingly negative. That encourages people and businesses to protect their savings, in particular through the purchase of currency and imported goods. This, in turn, increases the dollarization of the economy and leads to the withdrawal of savings from the financial system.

On the other hand, with the current demand for currency, its supply remains restrained, despite the gradual expansion and resumption of exports.

Therefore, the net sale of foreign currency by the National Bank in May to cover the growing deficit amounted to $3.4 billion, which is significantly more than recorded in March and April ($ 1.8 billion and $ 2.2 billion, respectively).

"Despite the sufficiency of the current level of international reserves to maintain a fixed exchange rate, this margin of safety is not unlimited, especially in a protracted war. In these circumstances, the NBU has to revisit a pro-active percentage policy and restore the attractiveness of hryvnia assets as instruments of investment and savings," the NBU said, explaining a sharp increase in the key rate.

As Ukrinform reported earlier, on June 2, the National Bank raised the key rate to 25%.

In January 2022, it raised the key rate to 10%. With the onset of military aggression, the key rate remained unchanged.