NBU explains reasons for decline of hryvnia and describe how it is going to react

Author

Maksim Nechiporenko

The reasons for the sharp drop in the hryvnia rate are the pressure related to the geopolitical tensions around Ukraine and a seasonal surge in demand amid an increase in the budget payments in December 2021.

This is stated in the report of the National Bank of Ukraine.

"I recall that we started last year with the exchange rate of 28.30 UAH per 1 US dollar. That is, now the exchange rate has not changed very significantly compared to January last year. The headlines state that the hryvnia has "collapsed", but this is not so. Last year, the hryvnia mostly appreciated, the volatility was very low and, perhaps, everyone is used to it, so the January volatility confuses the general public," said Oleksii Lupin, Director of the NBU Open Market Operations Department. notes.

According to him, Ukraine has been psychologically living with these risks since 2014.

"Unfortunately, we are accustomed to such a story to some extent. Of course, non-residents react to geopolitical tensions, and this causes pressure on the market. At the same time, the domestic market is going through this tension much more calmly than the external one," the Director of the Open Market Operations Department notes.

How the NBU is going to act

It is reported that the NBU continues to adhere to the principles of flexible exchange rate setting and smoothes out excessive fluctuations in the market.

"The size of gold and foreign exchange reserves allows the NBU, if necessary, to continue to be active in the foreign exchange market in a consistent and predictable way to level out temporary surges and calm market participants," the regulator reports.

Oleksii Lupin notes that the NBU does not plan to impose additional restrictions on the foreign exchange market. Currency liberalization will continue after the situation stabilizes.

"In terms of liberalization, we are now looking at the derivatives market. We see a very high potential for growth and therefore now our main efforts are focused on developing this market segment—both the banking client segment and the exchange segment. I also think that this year we will be able to open access for banks to bonds of external government borrowing," Oleksii Lupin said.

Currency market of Ukraine in figures

In general, the foreign exchange market is now the most liquid market in Ukraine. If one considers the interbank segment, then over the past three years it has grown by about 10-11% annually.

In 2019, the interbank average daily turnover amounted to $380 million, in 2020—$420 million, in 2021—$470 million, but in November 2021—January 2022 it exceeded $500 million.

"This is a positive trend because the greater the turnover on the market, the greater its liquidity. In general, we see that the recent turbulences in the foreign exchange market are going much better than the previous ones, including in comparison with March 2020," Oleksii Lupin sums up.