Ukraine's central bank walking on a tightrope

The Ukrainian National Bank’s decision to loosen its grip on the hryvnia will bring benefits in terms of restoring external competitiveness. But there are near-term risks too, including higher inflation and possible strains on banks’ balance sheets. If the devaluation is modest and orderly, these risks should be limited. However, with the devaluation coming against the backdrop of violent political protests and thin foreign exchange reserve coverage, the biggest threat is that the devaluation spirals out of control.