NBU downplays possible return to fixed exchange rate

The reintroduction of a fixed exchange rate is not being considered by Ukraine’s central bank, NBU, under the baseline scenario, its deputy governor Sergiy Nikolaychuk said on Wednesday.

On Tuesday, the NBU launched a new exchange rate policy, which it called ‘managed flexibility’, reversing the course introduced soon after Russia’s full-scale invasion of Ukraine last February.

Its goal is to strengthen the resilience of the economy and the foreign exchange market, facilitate their adaptation to internal and external shocks, and reduce the risks of accumulating currency imbalances that could result from a prolonged fixed exchange rate.

"We are not talking about returning to a fixed exchange rate now," Mr Nikolaychuk told Forbes Ukraine in an interview.

"We continue to act with a strong focus on exchange rate stability, we smooth out currency fluctuations, and if you look at it from this point of view, statistically, the official exchange rate is not much different from the level at which it was fixed."

The abandonment of the fixed exchange rate is one of the steps in the NBU’s official strategy to return the market to normal conditions, the official explained, adding it also provides for a gradual return to inflation targeting.

The NBU deputy governor did not rule out that, as in the case of the exchange rate, inflation targeting will be introduced before the end of the war.

"We are not setting any specific timeframe for the return to inflation targeting. We will be guided by the conditions," he said.

"Of course, the end of the war could make it much easier for us to create such conditions. However, I would not completely rule out that we will be able to return to inflation targeting even before the war ends."

So far, the ‘managed flexibility’ policy has had little effect on the official hryvnia exchange rate, with it depreciating against the dollar by just two kopecks.