The Ukrainian central bank’s anti-inflation strategy of allowing the national currency to appreciate caused the hryvnia to strengthen last week between 4 and 9 percent against an increasingly weak US dollar.

Since the National Bank of Ukraine has allowed the hryvnia to float against the dollar in late March, no longer propping up the official exchange rate of 5.05 hryvnia per dollar, Ukraine’s currency has appreciated by as much as 13 percent, currently selling at street exchange counters for between 4.45 and 4.65 hryvnia per dollar.

Though initially viewed as a short-term measure, the National Bank indicated it intends for a long-term appreciation of the hryvnia when it voted on May 23 for a 4.85 hryvnia per dollar official exchange rate as part of measures to tame Ukraine’s inflation, the highest in Europe.

“We have a paradoxical situation in which the hryvnia is sharply and significantly depreciating on the domestic market because of inflation, but simultaneously, it is getting more expensive on the currency market,” said Yaroslav Zhalilo, an economist at the National Institute of Strategic Research, a government-financed think tank that advises the Presidential Secretariat.

For the first time in its history, the Bank’s board of directors’ vote was vetoed by its supervisory board, which consists of businessmen and politicians and led by Petro Poroshenko, a mega-millionaire business magnate.

As a result, the Bank’s board maintained the official exchange rate is 4.85 hryvnia per dollar, while its supervisory board acknowledged the 5.05 hryvnia per dollar rate.

The strengthening hryvnia concerned Ukraine’s biggest businessmen, who export raw materials such as coal, iron and fertilizers. They have benefited by receiving strong foreign currencies for their exports.

“Ukraine is faced with a great challenge, and the National Bank, the government today and commercial banks have the serious responsibility of preserving the macroeconomic stability of Ukraine,” Zhalilo said.

If the exchange rate officially appreciates to 4.85 hryvnia per dollar, it won’t significantly affect the economy, according to a May 26 report by Sokrat Equity Research. However, the hryvnia’s sudden appreciation has significantly affected individual Ukrainians, many of whom receive their wages and keep their savings in dollars.

Observers agreed the National Bank is shifting from its dollar peg to a floating currency, and most economists supported this approach.

Source: http://www.kyivpost.com/