NBU Council chief elaborates on forex market prospects

Chairman of the Council of the National Bank of Ukraine (NBU), Bohdan Danylyshyn, says the situation on the country's forex market is predictable, being closely monitored by NBU experts.

"Yesterday, as of 12:00 [Kyiv time] on September 14, the hryvnia exchange rate on the interbank market reached UAH 28 to the U.S. dollar. The weakening of the hryvnia against foreign currencies, which has been observed since the early September, raises questions in society about the National Bank's ability to control the situation on the foreign exchange market. I'd like to reassure you immediately that the situation on the forex market is predictable," he wrote on Facebook on September 15.

Interbank market

According to Danylyshyn, demand for cashless foreign currency among bank customers increased on the interbank market in the last days of summer, which may indicate higher devaluation expectations among businesses amid uncertainty around the COVID-19 spread and new quarantine restrictions.

Hryvnia devaluation

Read alsoExpert forecasts moderate weakening of hryvnia against U.S. dollar by year-end"At the same time, it is worth recalling that back in September 2018, the hryvnia rate against the U.S. dollar exceeded UAH 28 per dollar. Therefore, the current devaluation of the hryvnia indicates only its possible rebound to the indicators observed two years ago. Moreover, the unreasonable strengthening of the hryvnia in 2019 as a result of the speculative capital inflow into government securities has done harm to domestic producers and strengthened negative trends in Ukraine's economy," he said.

Inflation

Danylyshyn says the weakening of the hryvnia will have no significant impact on increasing inflationary pressures: due to the hryvnia weakening in September, inflation may accelerate by 0.5 percentage points (pp) max, which will still keep inflation below the NBU's target of (5 +/- 1%).

As for economic activity, the devaluation of the national currency will have little to zero effect on it, while slightly contributing to the easing of monetary conditions due to the increase in domestic exporters' foreign exchange earnings in the hryvnia equivalent.

"In the medium term, the devaluation of the hryvnia will have a positive effect on the balance of trade in goods, but its short-term effect will be moderate given the dominant role of the U.S. dollar in pricing goods and services involved in foreign trade," the official said.

Revaluation of public debt

Read alsoOver US$21 bln to be spent on public debt payments in 2021 – finance ministerRegarding public finances, Danylyshyn says that the revaluation of the book value of public debt denominated in foreign currency will not affect the government's ability to make debt payments on hryvnia and foreign currency borrowings.

"The balance of funds in foreign currency in government accounts is sufficient to make all scheduled payments on public debt by the end of the year in line with the law of Ukraine on the 2020 national budget. But the weakening of the hryvnia will have a positive impact on increasing state budget's forex revenues off customs duties, recalculated at the NBU official rate," he said.

Danylyshyn emphasized that in the context of a floating forex rate, the hryvnia weakening against foreign currencies would help balance out macroeconomic indicators.

Given the above, the National Bank has so far refrained from intervening in foreign currency sales on the interbank forex market, while actively monitoring it and, if required, providing sufficient foreign exchange supply to balance supply and demand, according to the official. Danylyshyn added that NBU's international reserves are 1.3 times up from the hryvnia monetary base. Moreover, since the beginning of 2020, the National Bank's purchases of excessive supply of foreign currency from the market exceeded US$1.2 billion.

Background

• The Council of the National Bank of Ukraine has approved the Basic Principles of Monetary Policy for 2021 and the medium-term outlook with a 5% inflation target with a deviation range of 1 pp.
• According to the consensus forecast compiled by the Ministry for Economic Development, Trade and Agriculture, the average annual hryvnia rate this year will be UAH 27.00 per U.S. dollar against UAH 28.85 projected earlier.
• On September 3, 2020, the National Bank announced the inflation forecast by the end of 2020.
• Consumer inflation in Ukraine in June 2020 stood at 2.4% year-over-year, remaining at the level of June 2020.