“Why is the demand for currency growing and are there enough reserves in the NBU to satisfy it?”, — write: epravda.com.ua
Recently, several “experts” simultaneously released comments with an emphasis on the “breakneck” growth in demand for the currency. There are actually several tasks in such comments. The first is to sow panic, because these “experts” write in black and white that “the NBU may not have enough reserves to maintain exchange rate stability.” And this is undisguised manipulation, at least taking into account that the reserves of the NBU have reached a record level for the entire historical period. Undoubtedly, attention should be paid to the adequacy of foreign exchange reserves. Academic discussion should answer the question of how to maintain reserves and at the same time minimize the monetary consequences of their accumulation. But it is the stimulation of panic moods through information attacks that definitely does not contribute to the maintenance of currency reserves and leads to an unproductive loss of reserves for interventions aimed at neutralizing panicky demand for currency. Second, in this way they continue the campaign to undermine trust in the National Bank. For example, they emphasize that the demand for foreign currency is growing rapidly, possibly due to the fact that the NBU eased currency restrictions in 2024. Advertisement: Read also: Record reserves, new exchange rates and the largest sale of currency. What is happening to the foreign exchange market At the same time, they forget to say that liberalization in many ways made life easier for the Ukrainian economy and contributed to its recovery, and at the same time, it was not a determining factor in the growth of demand for currency. What’s more, if the NBU had not eased the restrictions, liberalization would have taken place in a less natural way – through companies bypassing the current restrictions. Why are such accusations made against the National Bank and how to detect manipulative content? Advertising: What do we know from the experience of information attacks on the NBU? First, any number can fertilize a negative context and, if desired, be spread across the network of interested media. Secondly, the density of news bombardment corresponds to significant events in the field of cooperation with international partners. Thirdly, the very density of one-sided whistleblowers is evidence of coordination and manipulative aggressiveness. It would be possible to once again ignore the overexcited infofield with the problem of interventions to support the hryvnia, if not for the fact that such replication of one-sided “news” will rather fuel negativity. Economic agents have been under the influence of asymmetrically indifferent news for a long time. And therefore sensitive to everything that nurtures their own alarmism; an obvious analogy of the new wave of attacks with the criticism of the NBU in previous years, when it was demanded to accumulate reserves and reduce the interest rate at the same time. And so now. He is criticized for the high rate and for significant interventions. Whereas high rates reduce the need for interventions. However, a caveat should be made here. First, when nominal incomes grow ahead of the rate of inflation, the issue of the currency structure of savings arises. If we assume that economic agents have a certain idea about the optimal share of foreign currency in the portfolio of assets, then any increase in permanent income will affect the formation of autonomous demand for currency. That is, the growth of demand for currency in the current conditions is a normal phenomenon. The NBU has enough reserves to satisfy it. In addition, he pursues a policy of attractiveness of the hryvnia, which limits the potential demand for the currency. Because if the hryvnia were to lose credibility, not only funds stored in hryvnia term deposits and OVDPs, but also from current accounts would end up on the foreign exchange market. If this did not happen in three years of a harsh full-scale war, then should it be expected in 2025, also taking into account the fact that the issue of the rhythm of international funding for this year is almost resolved, and the reserves are at a record level? Secondly, from the experience of dollarized economies, we know the fact of the stability of the demand for currency, which is maintained by inertia even when there are no obvious reasons for it. In simple words, people buy foreign currency out of habit. The breakdown of this structural factor occurs either in a rather long perspective of price stability and exchange rate flexibility, or under the influence of a strong equilibrium tendency to strengthen the exchange rate, which enjoys confidence. High real rates do not always work here, as they are not always trusted as politically and economically stable in the long term. This does not mean that they are not important. They are just as important to provide the prerequisites for expanding exchange rate flexibility while simultaneously targeting price stability. Thirdly, structural reforms help to get out of inertial dollarization. And what to do if wartime conditions and needs increase the structural demand for foreign currency? The answer is non-trivial. A rapid expansion of the range of exchange rate fluctuations can be counterproductive under certain circumstances. And it is unlikely that we will see a steady strengthening of the exchange rate in the near future. Currency liberalization may be a factor in the ability to realize demand for foreign currency. But it should be considered in the context of European integration, which provides for the freedom of movement of capital. And therefore, it will happen in the long term in a shocking way with uncertainty regarding the impact on macro stability. Or gradually, giving the opportunity to adapt policy instruments and calibrate them. Strengthening of currency restrictions is also possible in case of deterioration of the alarmist measure of pressure on reserves. Or an increase in the rate, which will only partially address the problem of redolarization. Therefore, it is better to leave behind it the profile aimed at bringing inflation to the target on the forecast horizon. It follows that choosing a combination of the timing and volume of liberalization, the rate level, the trajectory of the expansion of exchange rate flexibility and the volume of interventions requires significant analytical resources. And they clearly go beyond the text generated for compiling information accounts.