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Ukrainian
hryvnia in free fall after Central Bank scraps currency support
The
hryvnia lost 34 percent against the US dollar after the head of the
central bank signaled it can no longer support the currency with
regular interventions and will allow greater fluctuations. The
hyrvnia hit a historic low of 24.5 per 1 USD.
RT,
5
February, 2015
Get
used to market volatility," National
Bank of Ukraine (NBU) Governor Valery Gontareva told reporters in
Kiev on Thursday.
With
foreign exchange reserves at only $7.5 billion, the central bank “is
changing its approach to monetary policy, while strengthening its
rigidity,” according
to a statement published
Thursday.
After
the policy shift announcement, Ukraine’s hryvnia fell to 24.5
against the dollar and 28.092 against the euro.
The
bank also announced an unexpected interest rate hike to 19.5 percentfrom 14 percent, in a move to try and mend the worsening economic
situation.
Foreign
exchange reserves are at a ten-year low of $7.5 billion, down more
than 60 percent since last year. In December reserves stood at about
$10 billion.
"It's
more about economic failings and the war situation at this stage.
Interest rates won't make any difference just as they are not in
Russia,” Simon
Quijano Evans head of emerging markets research at Commerzbank in
London, told Reuters.
Real
vs. Market Value
The
National Bank of Ukraine (NBU) decided to scrap the indicative
exchange rate on Monday. The NBU started $3 million currency auctions
in November 2014 to establish the indicative rate serving as a
benchmark for banks after the currency lost 50 percent against the
dollar.
As
of February 5, the single exchange rate on the interbank currency
market will be used, not the indicative exchange rate.
However,
the indicative rate and the real exchange rate in the market varied
greatly.
On
January 30, the weighted average auction rate was 16.0072 UAH to the
US dollar, but the market exchange rate was 21.10 UAH per dollar.
All
future currency auctions have been cancelled.
IMF
supports hryvnia rate cut
US
Secretary of State John Kerry is in Kiev today and may discuss
further financial aid for Ukraine, an economy that not only suffers
from a weak currency, but high debt and low foreign currency
reserves.
The
International Monetary Fund (IMF) expressed support for a recent
decision made by NBU, spokesperson Gerry Rice told reporters at a
briefing in Washington. “NBU’s
decision to cancel currency auctions is wise,” he
said. “It
should help with elimination [of] multiple exchange rates.”
Rice
also added that a move to raise the bank’s key interest rate
will “help
to contain inflation and support national currency.”
Meanwhile,
the IMF might be getting cold feet in terms of providing Ukraine with
more financial aid.
The
government in Kiev already secured a $17 billion aid package from the
IMF last April, but only the first two tranches totaling $4.6 billion
have so far been sent.
The IMF is worried about Ukraine’s slow
progress in putting economic and political reform into practice, as
well as the over-bloated 2015 budget.
The
Central Bank expects the IMF to make a decision on the next tranche
on either Friday or Saturday.
Kiev
has already received pledges from the EU to provide €1.8 billion
($2.05 billion) and an extra $1 billion in loan guarantees from the
US, bringing Washington’s total Ukraine commitment to $2 billion.
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