Ukraine raised its main interest rate to a seven-year high of 25% from 10% on Thursday, tightening policy for the first time since the Russian invasion to fight double-digit inflation and protect the hryvnia as some commercial activities resume.
The February 24 invasion devastated the economy, which could shrink by at least a third this year, as the war forced 40% of businesses to close, destroyed infrastructure, blocked shipping routes and shrunk entire towns in ruins.
Speaking at a briefing, Central Bank Governor Kyrylo Shevchenko called for talks with the International Monetary Fund on a new aid package.
The rate hike was criticized by an adviser to Ukrainian President Volodymyr Zelenskiy’s office, who said the rate was too high and dangerous for the wartime economy. It was unclear if he was speaking on a personal basis.
The prime minister’s office and the finance ministry declined immediate comment.
The National Bank of Ukraine (NBU) had frozen its key rate at 10% at the start of the invasion, but last week it signaled that it could resume regular monetary policy reviews as business activity partially resumed in safer parts of the country.
He is betting that a sharp rise in rates will also push the government to raise the yield on domestic bonds, making hryvnia assets more attractive and preventing household incomes and savings from being eroded by inflation.
The central bank fixed the hryvnia exchange rate, forcing it to sell billions of dollars in foreign exchange reserves since the start of the invasion. It aims to let the currency float freely once conditions permit.
“The NBU expects that a significant hike in the policy rate to 25% will be sufficient to ease pressures in the foreign exchange market and stabilize inflation expectations, which in the future will lay the foundation for ‘a cycle of monetary policy easing,’ he added. said.
“If yields on hryvnia assets do not increase enough, international reserves will continue to deplete rapidly and imbalances will build up in the economy,” he said.
Inflation was already in double digits before the start of the conflict and rose further to around 17% in May from 16.4% in April, according to NBU estimates.
The central bank said inflation could double in 2022 from 10% in 2021, pushed higher by rising world prices and war damage to domestic production and supply chains.
“A decisive hike in the policy rate will boost investors’ interest in hryvnia assets, while easing pressures on international reserves and bringing inflation under control,” the NBU said.
The number of small businesses that had suspended operations in April fell to 26% from 73% in March, according to a survey by the European Business Association, the union of companies operating in Ukraine.
Thursday’s decision takes the main interest rate to its highest level since 2015, when Ukraine’s economy was reeling from Russia’s annexation of Crimea and the outbreak of war between Ukrainian troops and Russian-backed forces in eastern Ukraine.
“The NBU raised the rate to 25%. This is too much. Sudden movements during the war, when the economy is in a fragile state, are dangerous,” presidential adviser Tymofiy Mylovanov wrote on Facebook.
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