Ukraine Keeps Promise to Raise Rates as IMF Review Nears

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Ukraine raised interest rates for a second straight meeting in a bid to combat soaring inflation and reassure Western donors of the central bank’s independence.

Consumer-price growth has exceeded 10% for the first time since 2018, with the central bank promising another increase in borrowing costs when it last met. It delivered one on Thursday -- lifting the benchmark rate to 8.5% from 8%, as analysts predicted.

The decision comes as International Monetary Fund officials prepare to review Ukraine’s efforts toward unlocking a $5 billion loan that’s been frozen for months and is set to expire at year-end. The lender has fretted about government pressure on the central bank to lower credit costs for households and businesses.

Parliament gave preliminary approval on Thursday to legislation sought by the IMF that would help shield the bank from political meddling.

Addressing reporters in Kyiv, central bank Governor Kyrylo Shevchenko said tighter monetary policy “will help rein in inflation expectations, change the trajectory of inflation toward a decline and bring it back to the 5% target in 2022.”

Data released Thursday showed price growth held steady at 10.2% in August, slightly slower than economists surveyed by Bloomberg had estimated. But it still trails only Turkey in the region.

Read more: IMF to Assess Ukraine on $5 Billion Loan in September

Higher rates have weighed on the economy’s recovery from the pandemic. Gross domestic product unexpectedly shrank for a second straight quarter between April and June, signaling another recession as the country’s Covid-19 vaccination program continues to lag behind most of Europe.

“The economy has been recovering quickly in the third quarter, thanks to large harvests, a favorable external environment, sustained consumer demand and revived investment activity,” the bank said.

Ukraine isn’t alone in tightening monetary policy. Inside the European Union, Hungary and the Czech Republic have also increased rates, while neighboring Russia is expected to raise its benchmark for the fifth time this year on Friday.

While a hike may help win over the IMF, Ukraine must still meet other conditions set by the fund, particularly on improving anti-corruption efforts. Friction with the lender over aid has rattled investors in the past and has been cited by the central bank as another reason to maintain high rates.

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