Ukraine revaluation is first step towards curbing inflation

Standard & Poor's Ratings Services said that the National Bank of the Ukraine's decision to not intervene in the exchange rate market and permit the hryvnia to appreciate by just under 11% in nominal terms versus the U.S. dollar shows a redoubled willingness to use monetary policy to fight inflation. Liberalizing the exchange rate regime should help to curb inflation of tradeables, and in particular commodities such as gas and food, which are priced in dollars.
However, non-monetary factors are also contributing to rising inflation in the Ukraine (foreign currency BB-/Negative/B, local currency BB/Negative/B). In the first quarter of 2008, nominal government expenditures increased just under 50%, pushing up public sector wages and sending a highly inflationary signal to the private sector. Loose income policy continues to affect goods prices via second-round effects.
A stronger hryvnia will, moreover, stimulate import growth and squeeze the margins of exporters, which are already under pressure due to the rising price of gas. This process will accelerate the widening of the Ukraine's current account deficit from last year's 4.2% of GDP towards 10.3% of GDP in 2009. In the medium term, it is uncertain whether external financing, and in particular foreign direct investment, will continue to fund the better part of the Ukraine's growing external financing needs.
In light of substantial unhedged foreign exchange rate linked lending, greater exchange rate volatility could eventually lead to a worsening of household balance sheets, which is a rising risk in light of Ukraine's high domestic credit (to households and non-financial private enterprises) to GDP ratio of 67%.