As it believes the currency`s recent weakness is temporary
Ukraine`s central bank will refrain from propping up the hryvnia as it believes the currency`s recent weakness is temporary, and such moves could worsen the current account deficit, a senior central bank official said, Reuters reported.
Oleksander Savchenko, deputy chairman of the bank`s council, told the daily Ekonomicheskiye Izvestiya in an interview published on Thursday that much of the hryvnia`s recent weakness was down to temporary factors such as capital flight.
"The first reason for which we will not be going onto the interbank (currency) market is because we believe the current pressure on the hryvnia to be a temporary phenomenon on the market."
"The second reason for the central bank not to go onto the market is fast rising imports. In the current conditions, supporting the hryvnia`s rate would mean stimulating an even greater inflow of imports and spending our reserves on this."
Analysts have warned that the bank`s $38 billion reserves may not be enough to prop up the currency, while there was no prospect of the current account and trade deficits narrowing.
A combination of much more costly gas imports and lower prices for key steel exports will continue to boost the deficits at a time of a possible decline in foreign direct investment that has helped strengthen the hryvnia.
"If the global financial crisis deepens, investors` interest in emerging markets and inflows of capital to Ukraine could be limited," he said.
"As a consequence, covering the current account deficit will come either through devaluation or from foreign currency reserves... the central bank has no intention of going against the trend and wasting our reserves."
He added it would be "illogical" to keep to a strict currency bracket and that Ukraine`s economy should be prepared for "even more serious fluctuations".
The bank earlier this year abandoned a three-year policy of keeping the currency in a range of 5.00-5.06/$ through frequent interventions, allowing the currency to strengthen to 4.5/$.
It has lost those gains over the last month as foreign investors scrambled to find dollars to boost liquidity and withdrew from emerging markets. The hryvnia on Thursday fell further beyond a 3 1/2 year low, trading at 5.18-5.22 to the dollar.
In a swipe at international rating agency Fitch, which lowered its outlook to negative on Ukraine on a growing risk of a currency crisis, Savchenko said agencies` "groundless" statements about liquidity has influenced foreigners.
"If foreign investors want to believe in such an unprofessional judgment and hastily take their capital abroad, they will have to pay accordingly," he said.