Central bank abandons indicative exchange rate regime

UKRAINE - In Brief 03 Feb 2015 by Dmytro Boyarchuk

The Central bank plans to cancel current exchange rate regime when ‘legal’ exchange rate is 'indicated' every day during auctions. The regime was introduced on November 5th 2014, after parliament elections when the authorities realized that they do not have money for large-scale FX interventions. From that day (November 5th) the Central bank narrowed down interventions to near $5 million per day and instructed banks to use the rate the Central bank ‘identifies’ when selling currency during auctions. In the context of active hryvnia printing the mechanism did not work while black market was flourishing. At the ‘legal’ market exchange rate was fluctuating around 16 hryvnia per $1 while real market exchange rate was above 20 hryvnia per $1. Against this backdrop it was quite logical that at some stage the Central bank will have to do something with multiple exchange rates. According to media the new regime will start on February 5th. Apparently, ‘legal‘ hryvnia exchange rate will be crawling closer to 20 hryvnia per $1 over the upcoming days. Further hryvnia exchange rate prospects are hanging on the budget 2015 revision. The initially approved budget presumes near UAH 200 billion hryvnia printing which outlines galloping hryvnia devaluation for 2015. In this context further hryvnia decline looks inevitable unless the IMF manages to enforce real austerity measures already this month.

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