“The NBU is moving to an intermediate format of inflation targeting and tolerates flexibility”: the head of the NBU on exchange rate fluctuations

Since the beginning of 2024, the official dollar exchange rate has increased by 8% to 41 hryvnias, while the NBU actually controls the exchange rate through interbank interventions. According to the chairman of the NBU, Andriy Pyshnyi, the NBU is interested in the dollar regaining its stabilizing function for the economy.
“We do not tolerate devaluation. We tolerate flexibility – moderate exchange rate fluctuations, under the influence of supply and demand, in which direction they would occur, if they do not threaten price stability.” he said in interview
Pishnyi noted that the NBU is also interested in the exchange rate moving in both directions, because it brings back the feeling of currency risk, improves the adaptability of the economy, and allows avoiding the accumulation of imbalances.
“The exchange rate should regain its function as an absorber of internal and external shocks. But at the moment when the exchange rate turns into a shock generator, the National Bank, of course, takes appropriate measures. Especially since there are gold and currency reserves for this. We “cut” the peaks of dangerous volatility and we support constructive uncertainty”, – added Pishnyi.
Answering the question of whether the NBU takes into account the needs of the Ministry of Finance in its currency policy, Pyshnyi answered:
“No. They have their mandate, and we have ours. But we do not function in a vacuum, we take into account both external and internal factors, outline and analyze risks. And we take them into account when determining the optimal model of monetary and exchange rate policy, which is the best ensure the implementation of the NBU’s mandate”, – added the head of the NBU.
Regarding the inflation forecast, Pyshnyi noted:
“Currently, hryvnia deposit rates are on average 12.9%. After tax – 10.3%. But can they be compared with the inflation rate for the past year? No, therefore, when assessing the attractiveness of the hryvnia, you need to look at the inflation rate, which will be in a year.
The inflation forecast for this year is 8.5%, and for the next year – 6.6%. We also look at different expectations for inflation over the next 12 months, ranging from 7-9%. That is, the average rate of deposits ensures the protection of hryvnia savings for the population.
The same applies to government bonds, the rates on which fluctuate between 12.6% and 17.4%. There is no taxation, so this asset is even more attractive. This is confirmed by the fact that the volume of investments of individuals in this instrument has increased by 34 billion hryvnias since 2023: from 30 to 64 billion. Not a bad number, right?”.
However, the attractiveness of hryvnia assets is not only about mathematics, but also about the feeling of security of savings and balanced expectations, according to the head of the NBU.
“This year, we are under the pressure of very difficult circumstances: energy terror, external debt restructuring, which the media called one word (default – EP), which had no factual basis. All of this puts psychological pressure on people in one way or another. We feel it on the currency market and in the dynamics of term deposits.
If you want to evaluate the attractiveness of the hryvnia against the dollar, you should at least take rates and exchange rates for the same period. Over the past year, the official exchange rate of the hryvnia has decreased by 12.5%. The exchange rate on the cash market is 11.1%. Deposit rates in many banks were 15% and higher a year ago. For OVDP – 16.5%-20%. Those who invested in the hryvnia a year ago certainly did not lose.
Let’s count together. The average interest rate on deposits from three months is more than 15%, after tax clearance is more than 12%. It seems to me that focusing on the dynamics of devaluation as a factor in the attractiveness of the hryvnia, at least two important things are being forgotten.
First, the NBU managed to overcome the dangerous multiplicity of exchange rates in 2022-2023, when the difference between the cash and official exchange rates reached 20%, and now it is 0.6%. Secondly, the level of today’s cash rate is quite commensurate, and in some periods even stronger, compared to the rate at which the population bought the dollar in 2022.
Our task in the context of ensuring the attractiveness of the hryvnia is to create such conditions that people who have invested in hryvnia instruments will be able to buy no less goods and services a year from now than now. Our policy is aimed at ensuring that, in the medium term, buying dollars or euros is not guaranteed to be more attractive than investing in hryvnias.
Now the National Bank is gradually moving to an intermediate format of inflation targeting. We consider processes related to exchange rate fluctuations in the foreign exchange market as a component affecting the achievement of our inflation target.
Because of this, we even tolerate these processes to a certain extent, understanding that they are not dangerous. After all, we see that inflation is close to our five percent target and, after the expected acceleration in the second half of the year due to supply-side factors, will return to the target on the forecast horizon.
We do not tolerate devaluation. We tolerate flexibility – moderate exchange rate fluctuations, under the influence of supply and demand, in which direction they would occur, if they do not threaten price stability. We are interested in the exchange rate moving in both directions, because it brings back the feeling of currency risk, improves the adaptability of the economy, and allows us to avoid the accumulation of imbalances.
The exchange rate must regain its function as an absorber of internal and external shocks. But at the moment when the exchange rate turns into a shock generator, the National Bank, of course, takes appropriate measures. Especially since there are gold and currency reserves for this. We “cut” dangerous volatility peaks and support constructive uncertainty.
In the mode of managed flexibility, we are gradually returning another component of normality – inflation targeting. Yes, at the moment we are far from the classical regime, but we are again talking about achieving the inflation target, albeit not on the pre-war policy horizon of 9-18 months, but on the forecast horizon – 3 years.”, – Pyshnyi emphasized.