Hryvnia plunges 30% after Ukraine central bank lets it float freely

By bne IntelliNews February 6, 2015

bne IntelliNews -

 

The Ukrainian hryvnia fell 30% to a record low against the dollar on February 5 after the central bank let the currency float freely and raised its key interest rate in an effort to conserve its depleting foreign exchange reserves. 

With the currency hitting record lows everyday for the past few weeks and foreign reserves standing at $7.5bn - merely enough to cover five weeks of imports - the central bank has in effect abandoned attempts to prop up the currency. The currency has fallen from 8.7 hryvnia to the dollar a year ago to 24.63 at the lowest point on February 5.

The central bank raised its key interest rate to 19.5% as of February 6 from the current 14%, in a move aimed at curbing inflation and stablising financial markets. Valeriia Gontareva, the central bank's head, said that the bank is strengthening its monetary policy to target inflation and control "the market situation".  She added that the central bank has the tools required to ease market volatility and that she hoped the market would find a balance soon. "If there is any worsening of the situation the National Bank is ready with the tools needed to calm the foreign exchange market," Gontareva said.

However, analysts believe the rate increase would do little to dig Ukraine out of its financial mess, says Reuters. "They can't afford to lose more FX reserves but I don't think higher interest rates will scare people away from selling the UAH," said Simon Quijano Evans head of EM research at Commerzbank in London. "It's more about economic failings and the war situation at this stage. Interest rates won't make any difference just as they are not in Russia."

In 2014, consumer prices in Ukraine rocketed by 24.9%, while producer prices soared by 31.8%. Gontareva said that the high dependence of Ukraine's economy on imports is behind the high inflation rate in 2014, which resulted in price hikes amid a devaluation of the national currency.

In 2014, the NBU moved to flexible exchange rate formation, which resulted in the hryvnia practically halving in value against the dollar. In late 2014, the NBU shifted to a combination of market and administrative rate regulation, setting an indicative rate for the market through daily auctions in the interbank foreign exchange market using small quantities of its reserves. On February 2, the central bank announced the introduction of a single currency exchange rate, which  was eventually introduced on February 5.

The central bank now forecasts that GDP will contract by 4%-5% in 2015, while inflation will hit 17.2%. The inflation will slow down thanks to tighter monetary policy coupled with other stabilisation measures undertaken by the NBU and the government in the framework of a new co-operation programme with the International Monetary Fund (IMF).

During the press conference, Gontareva also announced that the NBU has reached an agreement with the IMF to increase financial aid to the country, without providing exact figures. Earlier, the IMF authorities also admitted that the Fund has been is in talks with Ukrainian authorities about increasing its financial support and said it would support a larger, longer-term funding plan than its current $17bn programme.

 

Related Articles

Ukraine's largest PrivatBank faces down nationalisation fears

Graham Stack in Kyiv - Ukraine's largest lender PrivatBank has survived a stormy week of speculation over its future, but there are larger rocks ahead, with some market participants anticipating the ... more

bne:Chart - Russia begins to steady the ship according to latest Despair Index

Henry Kirby in London - Ukraine and Russia’s latest “Despair Index” scores suggest that the two struggling economies could finally be turning the corner, following nearly two years of steady ... more

Austria's Erste rides CEE recovery to swing to profit in Jan-Sep

bne IntelliNews - Erste Group Bank saw the continuing economic recovery across Central and Eastern Europe push its January-September financial results back into net profit of €764.2mn, the ... more

Register here to continue reading this article and 2 more for free or purchase 12 months full website access including the bne Magazine for just $119/year.

Already a subscriber or registered - click here to recover access.

If you a IntelliNews Pro user - click here to login.

Thank you. Please complete your registration by confirming your email address.
A confirmation email has been sent to the email address you provided.

To continue viewing our content you need to complete the registration process.

Please look for an email that was sent to with the subject line "Confirmation bne IntelliNews access". This email will have instructions on how to complete registration process. Please check in your "Junk" folder in case this communication was misdirected in your email system.

Already a subscriber or registered - click here to recover access.

If you a IntelliNews Pro user - click here to login.

If you have any questions please contact us at sales@intellinews.com

Subscribe to bne IntelliNews website and magazine

Subscribe to bne IntelliNews website and monthly magazine, the leading source of business, economic and financial news and commentary in emerging markets.

Your subscription includes:
  • Full access to the bne content daily news and features on the website
  • Newsletters direct to your mailbox
  • Print and digital subscription to the monthly bne magazine
  • Digital subscription to the weekly bne newspaper

Already a subscriber or registered - click here to recover access.

If you a IntelliNews Pro user - click here to login.

bne IntelliNews
$119 per year

All prices are in US dollars net of applicable taxes.

If you have any questions please contact us at sales@intellinews.com

Register for free to read bne IntelliNews Magazine. You'll receive a free digital subscription.

Already a subscriber or registered - click here to recover access.

If you a IntelliNews Pro user - click here to login.

Thank you. Please complete your registration by confirming your email address.
A confirmation email has been sent to the email address you provided.

IntelliNews Pro offers daily news updates delivered to your inbox and in-depth data reports.
Get the emerging markets newswire that financial professionals trust.

"No day starts for my team without IntelliNews Pro" — UBS

Thank-you for requesting an IntelliNews Pro trial. Our team will be in contact with you shortly.

Dismiss