KYIV (Reuters) – Ukraine’s central bank raised its main interest rate to 9% from 8.5% on Thursday and stood ready to tighten monetary policy again as it warned about the risk of a military conflict with Russia and higher global food and gas prices.
The National Bank of Ukraine (NBU) began tightening monetary policy in March after cutting rates to an historic low last year to support an economy reeling from the COVID-19 pandemic.
It has raised rates five times this year as inflation spiked to 11%, the highest level since 2018 and more than double the central bank’s target range of about 5%.
The NBU is now weighing the risks of a sharp military escalation between Ukraine and Russia.
Kyiv and its NATO allies say Russia has massed tens of thousands of troops near Ukraine’s borders, heightening fears that a simmering conflict in eastern Ukraine could erupt into open war between the two neighbours.
Russia denies plans to attack Ukraine and accuses Kyiv of destabilising behaviour and failing to engage in the peace process. Ukraine’s President Volodymyr Zelenskiy will speak to U.S. President Joe Biden later on Thursday.
Investor jitters prompted the hryvnia to lose 3.3% against the dollar last month as foreign capital started leaving the country.
“Today’s decision took into account a number of pro-inflationary factors, pro-inflationary risks, and in the first place, we, of course, highlighted the increased geopolitical risks associated with a possible military aggression by Russia, which did not contribute to the reduction of inflation,” Deputy Central Bank Governor Sergiy Nikolaychuk told a briefing.
“Our financial market has sensed this tension. We hope that this tension will gradually ease.”
Nikolaychuk also said inflation was seen at around 10% at the end of the year, slightly higher than previously forecast. He added that inflation would hit consumer demand in the coming months and was starting to hurt Ukraine’s growth prospects.
Analysts polled by Reuters had been divided over whether the central bank would raise the rate again this week.
“Key risks to the economy are posed by an escalation of the military conflict with Russia and a longer global price surge than expected earlier,” the central bank said in a statement.
“Considerable uncertainty over whether or not the military conflict will escalate could worsen expectations, in particular inflation expectations, and cause investors to put off their investment decisions, which would dampen economic recovery.”
Speaking at a Ukrainian investment roadshow in London, Foreign Minister Dmytro Kuleba said the country had managed to develop and carry out reforms at the same time as repelling Russian aggression.
(Writing by Matthias Williams; Editing by David Goodman and Bernadette Baum)