Fixing hryvnia exchange rate remains main deterrent to inflation – director of NBU department

KYIV. Jan 16 (Interfax-Ukraine) – Fixing the hryvnia exchange rate has been and remains the main factor in keeping inflation under control, but this was achieved through a set of steps, including raising the key policy rate to 25%, Director of the NBU’s Monetary Policy and Economic Analysis Department Volodymyr Lepushinsky has said.

"Controlled inflation, which at the end of the year turned out to be lower than the forecast of 30%, was achieved thanks to a set of steps. It’s not only the key policy rate. This is, firstly, fixing the exchange rate. If the NBU had not fixed the rate, inflation would have been higher," he said in an interview with Interfax-Ukraine.

According to him, to maintain the fixing of the exchange rate, it is necessary to maintain international reserves and make the hryvnia attractive.

"Depositors should have confidence that the deposit rate will at least partially protect their funds from inflation. So in the context of the stability of the foreign exchange market and the fixed exchange rate, the key policy rate of 25% helped. Of course, the discussion that something could be done otherwise is always relevant, but so far the result is on the scoreboard," Lepushinsky said.

He added that the second effective tool in keeping inflation under control is limiting the amount of deficit monetization, since the National Bank has fixed a direct link between monetization and pressure on the foreign exchange market.

The director of the department said that at the current stage, the advantages of fixing the exchange rate are still greater than the disadvantages. "Firstly, the fixed rate is an anchor for stabilizing expectations. Now, it’s difficult to find an alternative to it, because, despite the fact that inflation is controlled, it’s still high, and we have not yet moved to the trajectory of its reduction," the representative of the National Bank said.

He added that, secondly, the FX market today has very little power to find balance, since the demand for currency is significant, which is due, among other things, to a significant state budget deficit, "which objectively should be in these conditions."

"So far we do not see any large imbalances associated specifically with fixing the exchange rate," Lepushinsky said.

According to him, the moment of return to the floating rate is connected not so much with any calendar dates, but with the prerequisites. "This will happen when the FX market has more opportunities for self-balancing and finding a balance, when there is an alternative anchor to stabilize expectations. Prior to the full-scale invasion, this role was played by inflation," the director of the department said.

According to him, it is very hard to predict the moment when there will be a transition from a fixed to a floating exchange rate. "Moreover, most likely, this will happen gradually," the representative of the National Bank said.

Commenting on the level of the discount rate, Lepushinsky said that when choosing it, it is necessary to look at the prospect, that is, at expectations and the inflation forecast. "Expectations now, despite all the challenges of the war, are below the key policy rate. Regarding forecasts: we will have a certain acceleration of inflation in the coming months, but from the second quarter it will begin to gradually decline and become lower than the key policy rate," the NBU representative said.

He also added that the central bank is not abandoning its 5% inflation target.