Ukraine Holds Main Rate as Political Crisis Weakens Hryvnia

  • Coalition infighting weakens hryvnia, delays IMF disbursement
  • Central bank targeting 12% inflation in 2016 as GDP recovers

Ukraine’s central bank left its benchmark interest rate unchanged for a fourth meeting as the nation’s worst government crisis since a pro-European coalition was swept to power two years ago added to risks inflation will remain above policy makers’ target.

The discount rate will stay at 22 percent, the National Bank of Ukraine said Thursday in a statement. Two economists in a Bloomberg survey predicted the move, while four saw a cut to 20 percent. While the benchmark 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.

“Further tight monetary policy aims to mitigate the unfavorable impact that political instability and global economic turbulence may have on the Ukrainian economy,” Governor Valeriya Gontareva told reporters in the capital, Kiev. “The National Bank of Ukraine plans to gradually ease monetary policy if inflation risks ease. First of all, if political stability returns and cooperation with the IMF resumes.”

Having begun to recover from an 18-month recession, Ukraine’s economy is facing renewed headwinds from infighting within the ruling coalition that’s holding up planned reforms, delaying cash from a $17.5 billion international bailout and weakening the hryvnia. While inflation slowed for a second month in January, it’s still more than triple the central bank’s 2016 goal of 12 percent.

The hryvnia has lost 7.3 percent against the dollar this year, prompting the central bank to sell some of its foreign reserves, which stood at $13.44 billion in January. Goldman Sachs Group Inc. estimated this week that the stockpile fell by as much as $1 billion last month because of political uncertainty that’s already led to a confidence vote in Prime Minister Arseniy Yatsenyuk.

Ukraine’s foreign-exchange market has stabilized, according to Gontareva, who said the central bank purchased $30 million at an auction Thursday as part of efforts to smooth volatility around the currency.

The bank also eased some capital controls. Individuals can now purchase the equivalent of 6,000 hryvnia ($230) a day and withdraw the equivalent of 50,000 hryvnia from bank accounts, Gontareva said. Even so, the bank extended by three months a requirement that exporters convert 75 percent of their foreign revenue to local currency.

President Petro Poroshenko and his team are splintering over stalled efforts to stamp out graft and improve the business climate, prompting the departure of two small coalition parties. International Monetary Fund Managing Director Christine Lagarde has threatened to halt Ukraine’s bailout without greater progress to combat corruption.

Frozen IMF cooperation is delaying $5.4 billion of aid, including bilateral assistance, according to Gontareva, who urged disbursements be restored as soon as possible.

On top of the political tensions, the conflict that’s wreaked havoc in the nation’s industrial heartland still hasn’t been resolved, with talks involving France, Germany and Russia taking place Thursday in Paris. Relations remain fraught with Russia, which slapped an embargo on Ukrainian goods in January and restricted transit to central Asia.

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