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Friday, July 4, 2008

Ukraine Central Bank Widens The Hryvnia Band

Ukraine's central bank announced today that it was going to allow the Hryvnia (Ukraine's national currency) to fluctuate more, in a desperate attempt to slow what is far and away Europe's fastest inflation. The Natsionalnyi Bank Ukrainy will allow the currency to rise or fall 4 percent from a midrate of 4.85 against the dollar. The decision was made public by the bank's Governor Volodymyr Stelmakh at a press conference in Kiev today. The bank kept the hryvnia at 5.05 to the dollar between April 2005 and May this year.

Stelmakh indicated that the decision was a reflection of a policy of moving towards a regulated floating hryvnia rate.

Rising inflation recently prompted Standard & Poor's to cut Ukraine's credit rating. Monetary policy makers view the wider hryvnia trading band as a step toward inflation targeting according to Petro Poroshenko, head of the bank's council. At the present time the central bank controls the hryvnia rate by selling and buying dollars.

Ukrainian policy makers had previously strengthened the hryvnia by 4 percent on May 21 in a bid to curb inflation, which accelerated to 31 percent in May.

The bank's 14-member supervisory council, which includes political appointees, reversed the hryvnia revaluation on May 22, the first veto since Ukraine gained independence in 1991, saying a stronger currency will harm exporters. The bank's board, led by Stelmakh, then in turn overturned the veto the next day.

The dispute over the exchange rate echoes a wider struggle between President Viktor Yushchenko and Prime Minister Yulia Timoshenko over economic policies. Timoshenko has welcomed the hryvnia strengthening, while Yushchenko has criticized it.

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