Ukraine Leaves Key Rate Unchanged Despite ‘Grounds’ for a Cut

(Bloomberg) -- Ukraine kept eastern Europe’s highest borrowing costs unchanged, though signs of an interest-rate cut later this year are emerging.

The central bank maintained its benchmark at 18 percent on Thursday, in line with economist predictions. While aid from the International Monetary Fund has resumed and inflation slowed more than predicted in 2018, price growth remains above the bank’s target.

The bank said in a statement that “it deems it necessary to maintain the existing reasonably tight monetary conditions in order to ensure that inflation returns to its target range in the first quarter of 2020.”

Governor Yakiv Smoliy had sown some doubt before the decision, telling lawmakers this month that “there are grounds” to trim the key rate. But there are other potential headwinds -- notably elections in March where President Petro Poroshenko faces an array of populist challengers and trails former Prime Minister Yulia Tymoshenko in polls.

Inflation pressures, while having eased, haven’t disappeared. Increases in government-regulated utility tariffs and higher wages triggered by an exodus of workers to richer European countries are among two factors stoking price growth.

Risks to price stability are also rising because of the political uncertainty, with parliamentary elections to follow the presidential vote. While the central bank maintains its goal to halve inflation to 5 percent by end-2020, it’s said that a “new political cycle” could represent a “significant risk.”

The bank sees positive factors that may lead to a rate cut this year, central bank Deputy Governor Kateryna Rozhkova told reporters Thursday in Kiev, the capital. Foreign reserves are currently $20.8 billion and will remain almost unchanged in 2019 as debt repayments are offset by Eurobond sales, aid from the World Bank and the European Union and remittances.

To contact the reporters on this story: Volodymyr Verbyany in Kiev at vverbyany1@bloomberg.net;Kateryna Choursina in Kiev at kchoursina@bloomberg.net

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

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