Ukraine central bank cancels indicative exchange rate

The National Bank of Ukraine (NBU) announced on Feb. 2 that it decided to cancel its indicative exchange rate regime. “We support a transparent exchange rate policy and a transition to market exchange rate mechanisms,” said NBU Head Valeriia Gontareva in a press release. “We are also aiming to create a unified effective exchange rate at the market. The main goal of the regulator’s monetary policy is to maintain a flexible exchange rate.” The new exchange rate regime is expected to start on Feb. 5, the Ukrainian News agency reported, citing an anonymous banker.

The current regime, which consists of indicative exchange rates set during NBU auctions, was launched on Nov 5, 2014. It has since been criticized for its inefficiency after multiple exchange rates have been widely used on the Ukrainian market. In recent weeks, the official hryvnia exchange rate was near UAH 16/USD, while the market exchange rate was above UAH 20/ USD.

Alexander Paraschiy: The NBU’s decision is quite logical since allowing multiple exchange rate regimes stimulates the development of black markets. Starting Feb. 5, we expect the official exchange rate to crawl closer to the UAH 20/USD mark. Further developments on the ForEx will depend on the scale of hryvnia printing for fiscal needs and the outcome of the ongoing IMF negotiations. Unless substantial budget cuts are performed and solid external funding arrives (we expect more clarity on both by late February), we anticipate further hryvnia declines throughout 2015.