From Fixation to Flexibility: NBU Unveils Currency Policy Strategy.

The National Bank of Ukraine (NBU) explained the reasons for the transition from a fixed hryvnia rate to a managed flexibility regime.

This decision, made on October 3, 2023, aims to ensure long-term stability of the Ukrainian economy and avoid the accumulation of macroeconomic imbalances, noted NBU head Andriy Pyshny in an article for Economic Pravda.

According to the head of the National Bank, the fixation of the rate in February 2022 was an emergency measure to stabilize the economy following the start of the full-scale invasion. Prolonged fixation of the rate can lead to currency crises, as already happened in Ukraine in 2008 and 2014.

Pyshny compares the fixation of the rate to a "tourniquet" for the economy.

"The fixation of the rate and the introduction of currency restrictions on February 24, 2022, are like the "tourniquet" that the NBU applied to stop the "critical bleeding" of the Ukrainian economy, which experienced an unprecedented shock," Pyshny noted.

However, he warns: "Like any tourniquet, such decisions over Time generate more harm than good and create the risk of losing international reserves".

The new managed flexibility regime allows the rate to respond to changes in market conditions. The NBU continues to smooth out sharp fluctuations in the rate and cover the structural currency deficit in the market. A flexible rate allows for better management of inflation and foreign trade, Pyshny believes.

"The transition to managed flexibility made the exchange rate an additional instrument of macroeconomic policy and a shock absorber due to its response to changes in market conditions. When the balance between demand and supply deteriorates (net demand increases), the hryvnia weakens, when the opposite, it strengthens," said the head of the NBU.

Pyshny also notes: "The change in the rate appropriately affects the competitiveness of domestic products, the state of foreign trade, the relative attractiveness of assets in national and foreign currencies, and inflationary processes. Therefore, macroeconomic imbalances are automatically corrected".

According to the head of the NBU, this approach helps automatically adjust macroeconomic imbalances and reduces the risk of sharp rate changes in the future: "As a result, the fact that the rate moves in different directions and over relatively short and longer time periods, responding to market changes, is a significant reason to worry less about sharp changes in the future".