Ukraine’s Gontareva Vows Rate Cuts for 2016 Credit Restart

  • Central bank head expects to meet 12 percent inflation goal
  • Official cost of borrowing to be ‘slightly’ above inflation

Ukraine’s central bank plans to cut interest rates to revive lending as soon as the end of this year, Governor Valeriya Gontareva said.

The National Bank of Ukraine, which last month unexpectedly cut its benchmark to 18 percent, expects its key rate to be “slightly positive to inflation” at the end of the year if the bank meets its 2016 price-growth target of 12 percent, Gontareva said in an interview in Kiev on Thursday.

Ukraine’s economy has been healing, with declining inflation prompting the second rate cut in two months in May. A reconfiguration of the government in April has also renewed optimism among investors that disbursements from a $17.5 billion International Monetary Fund bailout, held up since October, will resume soon. The Washington-based lender has said the next funds may be approved in July.

“If our key rate now is at 18 percent, at the end of the year, if we reach 12 percent, of course our key rate will be slightly positive to inflation,” she said.

The yield on the Ukrainian government’s dollar debt due in 2019 rose 17 basis points to 8.65 percent as of 4:31 p.m. in Kiev, data compiled by Bloomberg showed. Ukraine’s currency, which has strengthened 2.4 percent against the dollar since the government reshuffle on April 14, eased 0.2 percent.

Risks to Ukraine’s financial stability are declining as the most difficult part of the crisis is over for the nation of 43 million people, Gontareva told reporters after the interview. The central bank plans to continue easing capital controls, relaxing them as fast as possible to avoid destabilizing situation, she said.

‘Reasonable’ Rate

The country’s lenders need to improve risk management, while state-owned banks need strategic investors, Gontareva said. Privatbank, Ukraine’s largest lender, will lose market share to smaller rivals, she added.

The central bank isn’t requiring Privatbank to increase capital, Unian news service reported earlier this week, citing Chief Executive Oleksandr Dubilet. President Petro Poroshenko said last week there was “no threat to Privatbank’s existence.”

Ukrainian lenders have in the past borrowed foreign currency at 10 percent to 11 percent, which would make local-currency loans at 12 percent “reasonable,” Gontareva said in the interview. She forecast the “first signs” of lending as soon as at the end of 2016.

“If toward the end of the year we will reach 12 percent inflation, I think 12 percent in local currency is a very good interest rate for our businesses,” she said.

Court reform is also needed to help lending resume. An increase in utility tariffs, which comes into effect from July, could derail the inflation goal, Gontareva said.

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