Ukraine Raises Rates More Than Expected Amid Russia Tensions

Ukraine increased interest rates by more than expected as concern over tensions with Russia compounded the need to address soaring inflation.

The central bank lifted benchmark borrowing costs to 7.5% from 6.5% on Thursday -- going against the majority of economists surveyed by Bloomberg, who predicted an increase to 7%. The move came amid the threat of more intense fighting in the conflict that began after President Vladimir Putin annexed Crimea from Ukraine in 2014.

The bank in March hiked rates for the first time since 2018 and has warned of more monetary tightening to come. Despite the pandemic still weighing on the economy, inflation is at a 19-month high, while a $5 billion aid package from the International Monetary Fund remains frozen.

Ukraine Raises Rates More Than Expected Amid Russia Tensions

Inflation is “the most important indicator” for the central bank, Governor Kyrylo Shevchenko told a local news service last week -- even as one of Europe’s slowest inoculation programs against Covid-19 holds back the economy’s revival.

The bank lifted its 2021 forecast for price growth to 8% from 7% on Thursday. It cut its projection for economic expansion to 3.8% from 4.2%.

“We’re ready to continue the rate-hike cycle further, to a level that will ensure the return of inflation to the 5% target in the first half of 2022,” Shevchenko told reporters Thursday.

While Russia’s recent military buildup near Ukraine’s border has rattled markets, there’s hope now that this week’s offer by U.S. President Joe Biden to meet Putin in a neutral country will calm nerves.

Ukrainian officials continue to talk up the chances of a deal being struck soon with the IMF to unlock the next aid tranche. An adviser to President Volodymyr Zelenskiy said this week that Ukraine must implement all the lender’s requirements -- centered around anti-corruption efforts -- by July so its board can decide on the transfer before its August recess.

Economists surveyed by Bloomberg see just one $700 million disbursement arriving from the IMF this year.

©2021 Bloomberg L.P.

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