Ukraine to Raise Key Interest Rate to Highest in 13 Years

Ukraine’s central bank said it will raise the key discount rate by 3 percentage points for the second time this year as the government battles pro-Russian separatists and after a weaker hryvnia spurred inflation.

The bank will lift the rate to 12.5 percent, the highest level since 2001, from 9.5 percent, its press office in the capital, Kiev said today. The decision, effective tomorrow, was relayed to Ukrainian lenders earlier today, according to a letter obtained by Bloomberg.

Policy makers are facing a surge in inflation as the worst political crisis in more than two decades of independence resonates through the economy. Consumer prices rose 12 percent from a year earlier in June, with the hryvnia having lost 30 percent against the dollar this year and the government raising household utility tariffs to seal a $17 billion bailout.

“Taking into consideration the macroeconomic outlook and current inflation risks, there’s a need to implement additional measures to strengthen the domestic hryvnia value using discount rate,” the central bank said in the letter. It said the move would help improve “market conditions” and lay the ground for “renewed economic growth and a stable financial system.”

The hryvnia, the world’s worst-performing currency this year, was 0.1 percent lower at 11.725 per dollar as of 4:45 p.m. in Kiev, data compiled by Bloomberg show.

IMF Influence

Central bank Governor Valeriya Gontareva sees inflation at 17 percent to 19 percent this year. The regulator plans to move toward inflation targeting as early as next year to satisfy the International Monetary Fund’s loan terms.

“The key reason is to meet IMF expectations of tighter policy in the second half of 2014 and probably in 2015 to prepare the ground for the required shift to inflation targeting,” Dmitry Polevoy, chief economist at ING Groep NV in Moscow, said in an e-mailed note. Further rate increases are possible by mid-2015 because of elevated inflation, he said.

The IMF is in talks with Ukraine before releasing the second tranche of the loan this month. The lender said in May that Ukraine may need more cash depending on the extent of the economic damage from the pro-Russian insurgency in the east.

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