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NBU expects to increase reserves to US $28bn in May

May 13, 2010

The National Bank of Ukraine (NBU) intends to continue buying up surplus dollars on the interbank market. The regulator plans to buy around 1.5bn of the currency in May and thus to raise the volume of international gold and currency reserves to US $28bn by the end of the current month, noted Valeriy Lytvytskiy, head of the group of advisors to the NBU Governor.

“The National Bank of Ukraine is continuing to buy up dollars and increasing its reserves, especially in connection with the period during which IMF financing was interrupted,” said Mr. Lytvytskiy. “Our reserves are already more than US $26.5bn. I think that we will be able to reach US $28bn in May, or at least close to then.”

Mr. Lytvytskiy noted that the presence of the regulator on the market is driven largely by a desire to increase its currency reserves, and not because of any need to support the exchange rate at a specific level through administrative means.

“Right now, the stability of the hryvnia is provided exclusively through market factors, not through administrative intervention,” said the advisor to the NBU Governor. “Even without any effort on our part, the market has been showing a solid balance, with the rate at UAH 7.92/USD holding for a number of days already. Any strengthening that we are seeing is insignificantly small. We think that this is a good time to expand our reserve holdings: effectively, the emission of hryvnia is absorbed by growing demand for money on the part of business and the general population as the economy recovers.”

At the same time, economists are saying that there is evidence of that a balance in trends between the movement of the exchange rate and consumer prices. “In April, the hryvnia-dollar exchange rate grew 0.46%. In addition, we saw 0.3% deflation, suggesting that the buying power of the hryvnia has improved,” said Mr. Lytvytskiy.

In addition, he said, the Government concentrated resources on its NBU Treasury account in April, which increased the balance several fold. This made it possible to compensate for the saturation of the regulator’s emission policy in connection with the buying up of dollars. “If this continues,” said Mr. Lytvytskiy, “we will be in a position to simultaneously cover a sufficient money supply and protect the hryvnia from depreciation.

“We need to pay attention to the fact that one very promising means of raising people’s standard of living is to keep inflation to a level lower than has been built into the Budget, to keep disposable incomes from being gobbled up by inflation,” said the economist. “It’s also worth remembering that lower inflation affects the exchange rate, not just the reverse. That is, I think people will not change their hryvnia into another currency if they see that it is not being eaten away by inflation.”

Tags: finance