Ukraine Slashes Key Rate to Lowest Since 2014 on Inflation

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Ukraine made its fifth straight cut to eastern Europe’s highest interest rates.

Emboldened by plunging inflation, the central bank on Thursday slashed benchmark borrowing costs to 11% from 13.5% -- the lowest level since 2014. Most economists in a Bloomberg survey predicted the reduction.

The tilt to looser monetary policy is in tune with the world’s major central banks, which are keen to head off economic headwinds. Despite some eastern European nations mulling rate hikes, Ukraine wants cheaper credit to underpin growth, while its exporters complain about the strength of the hryvnia -- the top performer globally last year.

“The National Bank of Ukraine continues to ease monetary policy with the aim of maintaining inflation at the target level of 5% and supporting steady economic growth,” according to in a statement. “This monetary-policy easing will help revive lending to the real sector.”

Deputy Governor Oleg Churiy said in an interview this month that the downward trajectory for rates will be “more ambitious” than previously planned.

The bank sees said Thursday that it sees the key rate being lowered to 7% by year-end, compared with a previous forecast of 9%. It also trimmed its 2020 inflation projection to 4.8% from 5%.

“The most pronounced reduction in the key policy rate is expected to take place in the first half of the year,” the bank said. “It will lead to a further decrease in interest rates on loans for corporates and households, stimulating business activity.”

With the highest real interest rates among emerging markets, foreign investors have flocked to Ukraine’s local-currency debt and now own 15% of the total.

The government also sold 1.25 billion euros ($1.4 billion) of international bonds last week in a placement that was more than five times oversubscribed and resulted in a record-low yield.

There are, nevertheless, grounds for caution for the central bank.

The fate of Ukraine’s No. 1 lender remains uncertain following its nationalization in 2016. A billionaire former owner, once a business partner of President Volodymyr Zelenskiy, is challenging the state’s takeover. That may delay a $5.5 billion loan from the International Monetary Fund, which investors see as an anchor for reforms.

Ukraine is likely to receive $1.7 billion from the IMF in 2020, central bank Deputy Governor Dmytro Sologub told reporters Thursday.

--With assistance from Zoe Schneeweiss.

To contact the reporter on this story: Daryna Krasnolutska in Kyiv at dkrasnolutsk@bloomberg.net

To contact the editors responsible for this story: Balazs Penz at bpenz@bloomberg.net, Andrew Langley, Andrea Dudik

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