6/30/2008

Preparing to float

Ukraine moves towards a free exchange rate

Exchange-rate moves by Ukraine's central bank in the past month signal that the country is moving towards a floating exchange rate that unifies the official and interbank rates--and so helps to check inflation, which is running at over 30% year on year. Seemingly, the bank's management has fought off political pressure from exporters to make the change; and by acting now, it has a chance to hone its use of monetary levers before the country faces potentially serious economic and financial turbulence next year.

Ukraine's inflationary problems--growth in consumer prices averaged 22% year on year in the first quarter and is likely to exceed 30% in the second quarter--helped propel its central bank into action in late May, acceding finally to the recommendations of the IMF amongst others to change its exchange-rate policy. In the previous three years the country had maintained a de facto peg to the dollar, at HRN5.05:US$1. As the US currency declined against other major currencies, however, this helped to stoke import-price inflation in Ukraine and encouraged rapid growth in foreign-currency lending. On May 21st the board of the National Bank of Ukraine (NBU) announced a new official hryvnya exchange rate of HRN4.85:US$1. The NBU had already refrained for several weeks from interventions in the interbank market that had previously kept the rate there within a tight informal corridor of HRN5.0‑5.06:US$1. The NBU governor, Volodymyr Stelmakh, said that the appreciation could help reduce inflation by 3 percentage points in 2008. ...



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