Ukraine’s central bank raises rates to 25%
Ukraine’s central bank raised its key rate from 10% to 25%, its first increase since Russia launched its full-scale invasion of the country in late February.
The National Bank of Ukraine described Thursday’s decision as a “resolute step” to tackle inflation, which soared to 17% in May and is on track to more than double the 10% average of last year.
He said the hike would protect household incomes and savings in hryvnia, Ukraine’s currency, and prevent Ukraine from burning through its foreign exchange reserves needed to protect its exchange rate.
A smaller rise, the NBU said, “would have had no significant influence on the financial and economic system” in wartime because of the likely limited effect on asset prices.
The central bank said it “expects the government and banks to respond appropriately to the policy rate hike by raising interest rates on national government debt securities and deposits.”
This, he added, “will make hryvnia assets, including national government debt securities, more attractive, preventing household incomes and savings from being eroded by inflation.”
Lower rates would have created expectations of future rate hikes that would have dampened local currency demand and not given hryvnia assets above the inflation yields needed to rekindle investor interest, the central bank said. .
She added that she would likely cut rates once inflation concerns and pressures on the hryvnia eased.
A surge in government spending pushed the budget deficit up 27% month-on-month to $7.7 billion in May, Kyiv-based investment bank Dragon Capital said in a statement on Thursday. note to investors.
Airstrikes and artillery bombardments on cities caused more than $100 billion in infrastructure damage, according to the Kyiv School of Economics. The World Bank expects Ukraine’s economy to shrink by 45% this year.
The country’s growing dependence on imports forced the central bank to spend more of its foreign exchange reserves to maintain the hryvnia’s exchange rate with the dollar, rising from a monthly average of $2 billion in March. and April to $3.4 billion in April.
Kyrylo Tymoshenko, governor of the NBU, said Ukraine’s foreign donor support was enough to maintain its reserves, but called on the IMF to strike a new deal with Kyiv.
“As always, macroeconomic stability and sound public finances must be at the center of the program,” Shevchenko said, according to local media.
Timothy Ash, senior emerging markets debt strategist at BlueBay Asset Management, said raising rates was “the rational and right thing to do.”
“With sufficient Western financial support, Ukraine can survive Russia,” he added. But he warned that if Western lenders did not change policy by continuing to finance Kyiv mainly through debt, it would reach “unsustainable levels” and trigger a restructuring that would “set back the post-war development of the country”. ‘Ukraine for years’.
The central bank had been reluctant to raise rates in the first three months of the war and instead focused on keeping Ukraine’s banking and payment systems functioning.
He said the invasion had created “strong psychological pressure” which meant a rise would not stabilize inflation expectations or discourage Ukrainians from buying foreign currency.
In June, however, he said “risks to macro-financial stability have increased over the medium term” due to low returns on hryvnia assets as Ukraine depleted its reserves.
“The threat has grown that the dollarization of the economy may increase and the financial system may lose respective resources,” the NBU said.
“Household and business depreciation expectations are not stable and are sensitive to the evolution of the war, in particular to changes on the front line and other situational factors.”