The National Bank of Ukraine has published the Strategy to Ease FX Restrictions, Transition to Greater Flexibility of the Exchange Rate, and Return to Inflation Targeting (Strategy). The Strategy outlines priorities and principles for taking steps in the specified areas.
The document stipulates that the Strategy will be implemented in stages, only with preconditions being met and sustained, and following a proper analysis of potential impact and the effectiveness of previous measures. At each stage of the Strategy implementation, the NBU will make sure hryvnia assets stay sufficiently attractive. This approach will allow the regulator to minimize the risks to FX market sustainability, disinflation, and economic recovery.
The creation of the Strategy was prompted by the need to gradually ease restrictions and, in the longer term, to return to the traditional format of inflation targeting with floating exchange rate.
Going forward, easing the FX restrictions and allowing flexibility go of the exchange rate will make the economy more adaptive to changes in external and internal conditions. Moreover, this will restore the effectiveness of monetary transmission channels and reinforce the NBU’s capability to simultaneously deliver price and financial stability and maintain sustainable economic growth in the long run.
The implementation of the Strategy will not be determined by timeframes, but will depend on the presence of relevant macroeconomic preconditions. In particular, the focus will be on assessing the development of the following key parameters:
- inflation and inflation expectations
- international reserves and FX market sustainability
- interest rates (including the positive level of the real key policy rate and the attractiveness of hryvnia assets)
- financial stability parameters.
In view of the exceptionally high uncertainty related to the war, the Strategy assumes that the intensification of risks might cause the suspension of the next steps or reversal of previous steps to safeguard macroeconomic and financial stability.
The preconditions already in place and positive analysis results enabled the NBU to ease a number of FX restrictions in June. Meanwhile, prerequisites for next steps of the Strategy are still being formed.
On 29 June 2023, the NBU Board approved the relevant strategy, meeting the structural benchmark under the extended fund facility program with the IMF. Specifically, the Memorandum of Economic and Financial Policies signed with the IMF sets one of the structural benchmarks to be the preparation of the Strategy to Ease FX Restrictions, Transition to Greater Flexibility of the Exchange Rate, and Return to Inflation Targeting by the end of June 2023. On the other hand, the Memorandums does not specify deadlines for implementing the Strategy, as it will depend on due preconditions being formed.
The development and implementation of the Strategy is also aimed at fulfilling the provisions of the Monetary Policy Guidelines under Martial Law, which the NBU Council approved in April 2022. The Guidelines envisage a gradual return to inflation targeting, as this regime ensures the simultaneous achievement of the NBU’s goals of price and financial stability and support of sustainable economic growth in the long run.