Ukraine Price Goal Is Key to Sturdier Currency for Central Bank

  • Central bank targets 12% inflation in 2016 as crisis eases
  • Deputy Governor Sologub comfortable with currency volatility

Stability in Ukraine’s currency over the past few months will persist as long as next year’s inflation goal is met, according to the central bank’s deputy governor.

“We don’t see excessive volatility in the hryvnia exchange rate when we assume 12 percent inflation,” Dmytro Sologub said Tuesday in an interview in Kiev. “I’m very much OK with the volatility we’ve had since March, maybe even slightly more.”

Fluctuations have been about 5 percent in either direction in the past seven to eight months, according to Sologub. While the central bank has allowed the hryvnia to trade more freely, it steps in to smooth what it deems excessive movements in the currency.

The hryvnia plunged in February after street protesters ousted Ukraine’s pro-Russian leader and the economy succumbed to a recession. The depreciation, the past year’s second-steepest after Zambia’s kwacha, triggered a surge in inflation to more than 60 percent, worsening living conditions for the nation’s more than 40 million people. Persistent price pressure halted a run of interest-rate cuts by the central bank last month.

Currency Interventions

While weakening 44 percent this year, the hryvnia had stabilized since spring until a 3.2 percent decline that began Oct. 22. In an interview last week, central bank Governor Valeriya Gontareva attributed the drop to municipal elections and a delay in receiving the third tranche of a $17.5 billion bailout from the International Monetary Fund.

The central bank intervened last week and on Monday, selling dollars at an auction to prop up the hryvnia. The weakness probably won’t last, according to Sologub.

“We see this FX market volatility as a short-term trend, but we closely watch how the situation develops, ” he said. “Volatility is only good when it’s relatively low and understandable.”

Soaring Prices

Ukrainian inflation, the world’s fastest after Venezuela, slowed to 51.9 percent from a year earlier in September and may stand at about 45 percent by year-end, the central bank predicts. Assuming it decelerates as planned in 2016, policy makers will be able to trim borrowing costs, which reached as high as 30 percent in March, according to Sologub. Half of next year’s price growth will come from tariff increases as part of efforts to eliminate government subsidies for services such as heating, he said.

“We’re expecting inflation in 2017 of about 9 percent, so basically by the end of 2016 our rate will probably be slightly positive in real terms,” Sologub said. “Toward 9 percent, because we’re talking about forward-looking inflation in 12 months’ time."

That would help revive Ukraine’s economy, which the central bank forecasts will shrink 11.5 percent this year before expanding 2.4 percent in 2016. The recovery will be "fairly prolonged," according to Sologub.

"We have structural problems and don’t see a very quick revival in lending," he said. "It actually means that the central bank will have to maintain a tightening bias in its monetary policy for some time."

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