The FX market continues to be sensitive to changes in media reports about geopolitical tensions, but the situation remains in check. Using the monetary instruments at its disposal and available international reserves, the NBU has been able to smooth out temporary exchange rate spikes. The Ukrainian economy is currently more resilient than in previous crisis episodes, and the banking system is stable, well-capitalized, and liquid.
The growth in the demand for foreign currency in the FX market during the week of 14–18 February continued to be fueled by psychological factors as headlines in the media became increasingly more alarming. However, market participants responded in a more low-key way than in January 2022.
As before, the NBU pursued the floating exchange rate regime, meaning that it intervened only to level out excessive market fluctuations, allowing the exchange rate to be determined by supply and demand. Specifically, the central bank last week sold USD 503 million in the FX market to reduce exchange rate volatility and prevent exchange rate and inflation expectations from going out of balance. At the same time, the NBU bought foreign currency on the weekdays when FX supply dominated demand as the news background brightened. Overall, the NBU purchased USD 50 million over the course of the week. As a result, the regulator ended the week of 14–18 February as a net seller of USD 453 million.
The banking system is operating in business as usual mode and is meeting its commitment, as best it can, to provide financial support to the economy and households. The retail loan portfolio has been expanding at a steady pace. This growth is fully in line with the previous year’s positive dynamics, with no significant pick-ups or slowdowns in activity.
The volatility of retail deposits remains moderate and under control. It has been driven in part by households’ response to pressure from media outlets. However, depositors are not panicking and primarily make withdrawals from checking accounts, while the volume of term deposits has remained much more stable since the start of the year. Banks have a solid margin of safety and sufficient resources, including highly liquid ones, to cover even large deposit outflows if they occur.
The NBU will continue to monitor the situation and stand ready to take resolute action if necessary, but it intends to use only market instruments. Despite a decrease in January, the existing volume of international reserves, which as of 1 February 2022 was above the average annual level of the past nine years, allows the NBU to continue to smooth out excessive fluctuations in the FX market.