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NBU Updates FX Intervention Strategy

NBU Updates FX Intervention Strategy

NBU Board approved the Foreign Exchange Intervention Strategy of the National Bank of Ukraine (hereinafter “the Strategy”), which is perpetual and defines the policy of presence of the NBU in the interbank FX market under the inflation targeting regime and preservance of flexible hryvnia  exchange rate formation.

The Strategy needs to be updated, primarily, as the 2016-2020 FX Interventions Strategy is expiring. The new document is based on the preceding Strategy that proved effective and facilitated development of the FX market, adaptation of the market players to the floating exchange rate, growth of international reserves, and implementation of the FX liberalization policy. The above achievements call for an update of some Strategy provisions.

The updated Strategy will preserve the key three objectives of the NBU’s interventions:

  •  smooth the functioning of the foreign exchange market to avoid the negative impact of excessive exchange rate volatility and extraordinary events in the foreign exchange market on price and financial stability, as well as economic growth
  • accumulate international reserves and maintain them at the level generally perceived as sufficient
  • support the transmission of the key policy rate as the main monetary policy instrument, when it is not efficient enough.

The four key forms of interventions also remain the same, i.e. FX Auction, Single Rate Intervention, Request for Quotations and Targeted Intervention.

However, the NBU added a possibility to use derivatives along with traditional tod, tom, and spot terms of FX interventions, which is also mentioned in 2021 Monetary Policy Guidelines. Derivative financial instruments may be used, provided no unbalances are caused in the respective segments of the financial market.

The updated Strategy defines five principles for FX interventions in the interbank FX market:

  • compliance with the inflation targeting regime. The goal of FX interventions aligns with the NBU goals, among which achievement and maintenance of price stability is the primary one.  Central bank FX interventions keep on serving as an assisting tool in implementing monetary policy, while the key policy rate remains the main instrument;
  • conformity with the floating exchange rate regime. The NBU has no target rate or band for the exchange rate. Besides, the regulator neither counteracts the fundamental trends of the exchange rate nor backs them;
  • minimum adequacy of the foreign exchange interventions.  The scale and frequency of interventions correspond to the minimal level, wich is sufficient for the effective achievement of the above objectives. At the same time the NBU endeavors to minimize the effect on the exchange rate regime and will promote further development of the foreign exchange market;
  • constructive uncertainty of the parameters and tactics of the foreign exchange interventions for the FX market participants. The NBU defines the size, frequency, and moment for the foreign exchange interventions based on ad hoc assessment of the prevailing market conditions. Due to the high sensitivity of that information, certain parameters, reasons and tactics of the foreign exchange interventions remain out of the public view. It minimizes the influence of the NBU on market expectations, keeping the room for the market mechanisms to ensure equal opportunities for the market players and efficient FX interventions.
    The NBU observes reasonable transparency when publishing the information on its intentions to conduct foreign exchange interventions and their outcomes. The policy of the regulator’s communications regarding the foreign exchange interventions remains unchanged;
  • equal opportunities for the market players. The criteria for participation of the market players in foreign exchange interventions are open and transparent; they are defined in the NBU regulations.

The updated strategy of the foreign exchange interventions was developed in a course of consultations with the international partners and approved by the NBU Board decision dated 29 December 2020 №769-рш.

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