The Return of the Interbank Market as the Foundation for the Official Exchange Rate of the Hryvnia

Starting from 03 October 2023, in accordance with the resolution of the Board of the National Bank of Ukraine ("NBU") dated 02 October 2023, No. 121 "On Amendments to the Decision of the NBU Board dated 24 February 2022, No. 18", the NBU is transitioning to a regime of managed exchange rate flexibility. This transition is part of the implementation of the Strategy for Easing FX Restrictions, Transitioning to Greater Flexibility of the Exchange Rate, and Returning to Inflation Targeting, as approved by the NBU Board on 29 June 2023.

Henceforth, similar to the period before 24 February 2022, the official exchange rate will be determined based on the results of trading sessions in the interbank market, rather than being set directive, as was the case for over 17 months (24 February 2022, to 02 October 2023). Other indicative exchange rate formation measures will also be implemented.

The NBU plans to significantly influence fluctuations in the interbank foreign exchange market by compensating for the structural deficit of foreign currency, which is characteristic of the Ukrainian economy due to export limitations. Under these conditions, the NBU anticipates that the exchange rate in the interbank market may both increase and decrease, responding accordingly to changes in the demand and supply balance in the foreign exchange market. The NBU does not define the possible limits of exchange rate fluctuations, for the support of which interventions will be carried out, nor the threshold values at which a return to a fixed exchange rate may occur.

Between 03 October and 05 October 2023, the hryvnia weakened against the US dollar by only 3 kopecks compared to the previously fixed rate of 36.5686 hryvnias per US dollar.

It is important to note that this regime does not signify an irreversible return to a floating exchange rate system. According to the words of NBU Governor Andriy Pyshny, an irreversible return is not currently being considered. Instead, the emphasis was on achieving a structural milestone as outlined in the memorandum submitted by the Government of Ukraine to participate in the IMF program. Since the NBU has previously intervened in currency trading, there seems to be no fundamental difference in the mechanism between October 2023 and, let's say, October 2020.

As of 03 October 2023, Resolution No. 18 once again removes restrictions on the cash exchange of foreign currency by banks and other "exchangers." Until 03 October 2023, there was a corridor of 1% from the NBU official exchange rate on the day of the buying or selling operation. The currency selling rate in the cash segment of the foreign exchange market, where individuals have the opportunity to buy and sell currency, will continue to be determined by demand and supply. However, the intention is to return to the practice where managed exchange rate flexibility in interbank trading directed the cash segment rate. In other words, the reference to the official rate becomes redundant.

The NBU emphasizes that the transition to the new exchange rate regime will increase the adaptability of the financial market and the economy as a whole.