Ukraine's Central Bank Hikes Rate

By Nick Shchetko 

        KIEV, Ukraine--Ukraine's central bank increased its key rate to 19.5% from 14% and scrapped foreign currency auctions Thursday, moving the battered local currency a step closer to a free float in an effort to steady the market.
        The bank said the moves were aimed at stabilizing the hryvnia, which has lost half of its values against the dollar over the last year amid Ukraine's deepening economic crisis and the war with pro-Russian separatists in the country's east. The latest moves are part of a loan program being finalized with the International Monetary Fund and will reduce the plethora of different rates at which the currency has been trading.
        Even with the sharp tightening of credit, central bank officials warned that risks of higher inflation and further declines in the value of the hryvnia remain high. They also noted that the shift to a market-set rate doesn't yet amount to a full-scale free float, since administrative restrictions on access to foreign currency imposed over the last year to steady the rate remain in place.
        "The main reason for this decision was the rise in inflation," said Sergey Nikolaichuk, head of the National Bank of Ukraine's monetary-policy department. "The main reason for the acceleration of inflation has been the [fall in] the exchange rate."
        He warned that "inflationary and devaluation risks will remain rather high in the near future," adding that, "in these conditions, there's no doubt about the need for a tighter monetary policy."
        The National Bank said that gross domestic product is expected to contract 4%-5% this year after falling 6.7% last year. Inflation, which reached an annual rate of 24.9% in December, is expected to fall to 17.2% in December 2015 and to single digits in 2016, the bank said.
        Until Thursday, the National Bank had been holding daily foreign-currency auctions to set an indicative market rate that was often well below the actual market level. Under the new system, the bank said "the hryvnia's exchange rate will be set by banks based on the objective parameters of market demand and supply." A senior bank official said the National Bank will continue to intervene on the market, but primarily by selling foreign currency directly to the state gas company NAK Naftogaz, which is the country's main importer.
        The National Bank introduced the auctions in November but the mechanism proved ineffective given the heavy pressure on the currency. Often, the indicative rates differed substantially from market ones, with the gap widening as pressure mounted in recent days. On Wednesday, the interbank rate slipped to record lows of 23.05 hryvnia a dollar, even as the National Bank's indicative rate was 16.42, the Interfax news agency reported.
        The sharp hike in interest rates is aimed at fighting rising inflation and shoring up demand for the hryvnia, the National Bank said, and isn't expected to substantially impact industry, since credit is already very hard to get given the economic uncertainties due to the continuing war. The National Bank also said the threat to the banking system from the rate hike is less than the threat from a continued drop in the currency.
        The National Bank said the main driver of inflation has been the sharp drop in the currency, as well as administrative price hikes imposed at the start of this year under the government's reform program.
        (END) Dow Jones Newswires

        February 05, 2015 04:17 ET (09:17 GMT)

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