Ukraine's hryvnia steadies after rate hike

By bne IntelliNews March 4, 2015

bne IntelliNews -

 

Ukraine's floundering hryvnia strengthened to UAH21.7 to the dollar on March 4 after opening at UAH24.4. The strengthening follows a tightening of monetary policy by the National Bank of Ukraine (NBU) and could mark a crucial upturn in the hryvnia's rollercoaster ride of the past year.

Sliding from UAH8 to the dollar in February 2014 to UAH16 at the start of 2015, the currency then plummeted to UAH32 to the dollar on February 26, striking panic into the population.

UAH 21.7 is the exchange rate on which the state budget for 2015 was based when parliament passed a package of amendments on March 2-3. Ukraine is currently waiting for approval of the budget's amended parameters by the International Monetary Fund in order for an extended funding facility of $17.5bn to be approved. Ukraine urgently needs the funds to avoid default on foreign debt payments.

President Petro Poroshenko had already predicted on March 3 that the currency would now shift to the level set down in the budget, thanks to joint action by the NBU and the finance ministry.

"We are taking decisive steps to allocate additional resources and return the hryvnia exchange rate to UAH 20-22 per $1," Poroshenko said, as quoted by Interfax Ukraine. "I am confident we won't allow any panic in exchange offices or banks."

The hryvnia strengthening follows a sharp tightening of monetary policy by the NBU on March 3, aimed at taking hryvnia liquidity out of the banking system, thus relieving pressure on the exchange rate.

The measures comprised hiking the policy rate to 30% from 19.5%, increasing reserves requirements for banks, and reducing the monetary base increase scheduled for 2015.

"A 30% discount rate is not good for the economy but it's aimed at addressing extreme exchange rate volatility, which is not good either," writes Concorde Capital's Oleksandr Paraschiy. "A temporary hike in the discount rate is justified in order to smoothen the hryvnia exchange rate," he adds.

The NBU will also refrain from transferring advance payments on profits to the government, regarded as a traditional channel for hryvnia printing, which has in the past put pressure on the exchange rate.

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