Starting from 1 August and until the end of 2021, the National Bank of Ukraine (NBU) intends to buy up to USD 5 million per day on the interbank FX market in order to raise international reserves. Such interventions will be conducted only if the hryvnia exchange rate strengthens in comparison with the previous trading day. The previous indicator for daily FX purchases, in effect since the end of April 2020, was USD 20 million.
The revision of the indicator is in accordance with the direction of the NBU’s monetary policy, which is intended to counter inflationary pressures and improve the monetary transmission mechanism, through both the FX and the interest rate channels.
"Ukraine’s international reserves are at a high level – more than USD 28 billion. On account of this, the NBU Board decided to decrease its regular intervention volumes for the purchase of foreign currency for reserves," noted Yuriy Heletiy, Deputy Governor of the NBU.
The indicative volume of FX purchases of USD 5 million is slightly over 1% of the average daily operations on the Interbank FX market, so this will not affect exchange rates on the market.
Note that according to the NBU’s Foreign Exchange Intervention Strategy, another purpose of the central bank’s FX interventions is to alleviate FX market volatility. Accordingly, the central bank, if necessary, will continue to conduct FX interventions by purchasing and selling foreign currency on those days on which there is a significant imbalance in supply and demand on the market.
At the same time, this year, FX market conditions improved. The market is evolving, expanding and increasing liquidity," said NBU Deputy Governor Yuriy Heletiy. "Accordingly, its capacity for self-balancing is strengthening, and the role of the NBU is lessening. In January – July 2021 FX market remained balanced, while the NBU decreased FX interventions three-fold yoy.
"The regulator’s policy remains unchanged, as before, the NBU will only smooth out excessive rate fluctuations," added NBU Governor Kyrylo Shevchenko. "The NBU has no intention of changing its Foreign Exchange Interventions Strategy, far less divert from the floating exchange rate regime. The balance of demand and supply from participants of the FX market will continue to determine the hryvnia exchange rate."
The planned volumes of interventions are of an indicative nature. Depending on market conditions, the NBU’s interventions to purchase foreign currency may constitute a lower amount, or not occur at all. Daily purchases may exceed the announced amount. However, such interventions will be conducted for other purposes, as set out in the Foreign Exchange Intervention Strategy of the National Bank of Ukraine, in particular to smooth out excessive volatility on the FX market.
The setting of quantitative indicators for daily interventions is an important element of the floating exchange rate regime. This regime does not require the NBU to maintain a specific exchange rate. The central bank’s presence on the FX market aims at accumulating international reserves, balancing the FX market, and supporting transmission of the key policy rate.