Ukraine raises interest rates for first time since 2018

KYIV: Ukraine’s central bank raised its key rate for the first time since 2018 on Thursday - to 6.5% from an historic low of 6% - and stood ready to take further action to restrain inflation while supporting an economy hit by the coronavirus pandemic.

Ukraine tumbled into recession last year and the government struggled to secure more loans from the International Monetary Fund because of concerns about reforms and corruption.

Rising inflation has coincided with a resurgence of COVID-19 since the start of the year that Prime Minister Denys Shmygal warned could push Ukraine back into a tough lockdown despite the start of its vaccination roll-out.

The market had been divided on whether the National Bank of Ukraine would hold fire to support businesses and prevent a rise in borrowing costs, or raise rates to restrain inflation that began to overshoot the central bank’s 5% target this year.

“The decision is aimed at gradually reducing inflation to its target, as the Ukrainian and global economies are recovering,” the National Bank of Ukraine said in a statement.

“The NBU stands ready to raise its key policy rate more resolutely in order to curb fundamental inflationary pressures, stabilize expectations, and bring inflation back to its target.”

The central bank’s base assumption remains that Ukraine will secure more IMF loans under a $5 billion deal.

But having initially expected the next tranche of money by March, the government has scaled back its expectations and Shmygal now hopes a preliminary agreement can be reached by June.

Central Bank Governor Kyrylo Shevchenko’s predecessor resigned last year citing political meddling, but Shevchenko played down any concerns about the bank’s independence in a Reuters interview last month.

The NBU had kept its key rate at 6%, the lowest level since independence in 1991, for the last nine months.

But inflation climbed up to 6.1% in January, above the NBU’s target of around 5%. The central bank expects inflation to peak in mid-2021 before easing back next year.