Ukraine Keeps Key Rate at 22% as Inflation Tops Expectations

  • Decision follows two consecutive months of rate reductions
  • Economists in Bloomberg survey saw benchmark being cut to 21%

Ukraine left its benchmark interest rate unchanged after two months of cuts as inflation exceeded the central bank’s forecasts last month.

The discount rate will stay at 22 percent, the Kiev-based central bank said Thursday in a statement. The median forecast in a Bloomberg survey of five economists was for a reduction to 21 percent.

The central bank is trying to balance a shrinking economy and inflation still the world’s second fastest behind Venezuela’s after having peaked at more than 60 percent in April. Bank Governor Valeriya Gontareva pledged last month to cut borrowing costs significantly if price growth subsides to 12 percent next year. Policy makers had been trimming borrowing costs as Ukraine’s recession showed signs of ending and as the conflict in its easternmost regions cools.

“The 22 percent rate is optimal as of now,” central bank governor Gontareva said during a press briefing in the Ukrainian capital. ’The main reason for this decision is the increase of short-term inflation risks.”

Hryvnia, Inflation

The hryvnia weakened for a third day, retreating 0.5 percent to 23.1 against the dollar as of 3:23 p.m. in Kiev. More stability in the past year’s second-worst-performing currency is also soothing the economic backdrop. As the hryvnia plunged at the start of 2015, the central bank imposed capital controls and raised its key rate to as high as 30 percent.

Inflation slowed to 51.9 percent in September from 52.8 percent in August. Consumer prices rose more quickly in September than anticipated because of the delayed effects of the hryvnia devaluation and rising administrative tariffs, Gontareva said. Inflation may accelerate in October on a smaller-than-expected harvest and increasing heating prices.

Looking further ahead, weak domestic demand, low prices for commodities and Ukraine’s balanced current-account and fiscal policy are among reasons to expect a “disinflationary trend,” Gontareva said.

Green Shoots

As a cease-fire holds in Ukraine’s easternmost regions, Gontareva said she sees signs of economic recovery. Gross domestic product rose in the third quarter and is projected to expand 2.4 percent in 2016, she said. Foreign-currency deposits rose for the first time in two years, increasing 1.4 percent to $15 billion as of Oct. 1.

The central bank plans to buy more dollars in the market if supply exceeds demand, according to Gontareva. The monetary authority will also complete stress tests of Ukraine’s 20 largest banks by the end of November, she said.

Ukraine may receive the next tranche of an International Monetary Fund bailout by year-end, triggering a “significant” increase in international reserves, Gontareva said.

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