Ukraine Keeps Main Rate Unchanged on Risks to Inflation Forecast

  • Central bank still sees CPI at 12% in 2016, cuts GDP forecast
  • Commodity, currency markets among risks to inflation outlook

Ukraine’s central bank left its benchmark interest rate unchanged for a third meeting, affirming this year’s inflation forecast while warning of risks from commodities and currency markets, and trimming its outlook for economic growth.

The discount rate will stay at 22 percent, the National Bank of Ukraine said Thursday in a statement, matching the forecasts of three of four economists in a Bloomberg survey. The bank sees consumer prices rising 12 percent in 2016, with gross domestic product advancing 1.1 percent, less than half its previous 2.4 percent projection. Governor Valeriya Gontareva will hold a news conference at 2 p.m. in the capital, Kiev, to discuss the decision.

“Weak demand will help slow inflation this year,” the central bank said in its statement. “Risks include declines in the prices of Ukrainian exports and devaluations of currencies of our trade partners. Because there’s a high probability of these risks materializing, the central bank maintained the current monetary conditions.”

As Ukraine recovers from an 18-month recession brought on by the conflict in its easternmost regions, policy makers are grappling with inflation of more than 40 percent and currency weakness that stems from delays in a $17.5 billion bailout. While they lowered their benchmark in August and September, bringing borrowing costs down from as high as 30 percent, they’ve left it flat since until consumer-price growth eases.

While the discount rate is currently ineffective as a means of transmitting monetary policy to the wider economy, the central bank has pledged to boost its role as part of a switch to inflation targeting.

Uncertainty over the timing of $1.7 billion in aid from the International Monetary Fund, as well as declines in the prices of Ukrainian exports such as grain and iron ore, have weighed on the hryvnia. The currency -- still subject to capital controls -- has weakened 4.5 percent against the dollar this month, data compiled by Bloomberg show, prompting the central bank to sell dollars.

Annual inflation slowed to a 10-month low of 43.3 percent in December.

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