The Council of the National Bank of Ukraine hasprovided recommendations to the NBU Board and the Government.
On 17 January 2016, the Council of the National Bank of Ukraine held a special meeting to discuss the situation in the FX market and the factors affecting it, as well as to provide recommendations to the NBU Board and the Cabinet of Ministers of Ukraine.
During the meeting, NBU Deputy Governor Mr Oleg Churiy reported on the situation in the FX market and offered an outlook for future FX market developments in 2017.
The meeting participants agreed that heightened exchange rate volatility observed in recent months is temporary in nature and is driven by situational and seasonal factors:
- higher budgetary expenditures (higher supply of domestic currency) in the last weeks of December 2016;
- fueling expectations associated with the nationalization of country’s largest systemically important banks;
- lower FX proceeds from agricultural exports;
- stronger demand for foreign currency from market participants due to the need to make payments under FX loans in the end of the year.
The fundamental factors capable of triggering a depreciation spiral are currently absent and the external environment remains broadly favorable. The current account of the balance of payments has improved recently. FX proceeds from grain exports keep flowing to the domestic markets. Also, favorable trends in the global markets of ferrous metals and metal ore persist.
In its turn, the NBU promptly responded to supply-demand mismatches in the FX market by conducting FX interventions, while remaining committed to a flexible exchange rate regime. However, the NBU had to halt a cycle of monetary policy easing, leaving the key policy rate unchanged at 14% and keeping FX restrictions in place in the money and FX markets.
The NBU Council members agreed that current exchange rate fluctuations would have a limited impact on future inflation developments and the NBU’s ability to implement tasks defined in the Monetary Policy Guidelines for 2017 and the medium-term. Therefore, the NBU Council urges not to give in to panicky sentiment fomented by some experts and politicians.
“The NBU Council closely monitors FX market developments. We live in a volatile external environment, in the context of openness of the domestic economy exposed to external and internal shocks. The processes currently unfolding in Ukraine are common for all transition economies. Unless we build a sustainable economic system and establish clear rules for all economic agents, there is a high possibility that the situation seen this year will recur in the future. Under current economic conditions, we have to get adjusted to a flexible exchange rate regime and implement measures regardless of the market situation.
Today we have openly discussed the causes behind FX market developments and worked out proposals and recommendations to the NBU Board and the Cabinet of Ministers of Ukraine. In particular, the NBU Council recommended the NBU Board take some efficient measures to stabilize the situation in the FX market. In its turn, the Government and the NBU have to review current practice of making large one-off budgetary payments at the end of the year as it has the potential to have negative macroeconomic consequences. Furthermore, fiscal expansion not only complicates efforts to implement monetary policy but also leads to losses of public funds. Therefore, the Government should take on board recommendations provided by the NBU Council. I feel confident that implementation of these recommendations will contribute to efforts to restore confidence in banks, return deposits to the banking system and lay a solid foundation for economic recovery,” said Chairman of the NBU Council Mr Bohdan Danylyshyn.
Pursuant to paragraph 13 of Article 9 of the Law of Ukraine On the National Bank of Ukraine and with the aim of creating the necessary conditions for the NBU to meet its statutory objectives, the NBU Council has decided to provided recommendations to the NBU Board and the Cabinet of Ministers of Ukraine. This being said, the NBU Council underlined the need for the NBU Board to follow recommendations that are binding in accordance with the Law of Ukraine On the National Bank of Ukraine. In addition, the NBU Board is required to keep the NBU Council and the public about measures taken to stabilize the FX market and formulate effective monetary policy.
The aforementioned recommendations will soon be published under the “NBU Council” section of the NBU’s website.