Ukraine hikes rate 300 bps to 12.5% to boost hryvnia

    Ukraine's central bank raised its benchmark discount rate by another 300 basis to 12.50 percent to raise the value of the hryvnia currency and stem inflationary pressures.
    The National Bank of Ukraine (NBU) already raised its rate by 300 basis points in April to protect the value of the hryvnia amid political unrest in eastern Ukraine and has now raised the discount rate by a total of 600 basis points this year after cutting it by 100 basis points in 2013.
    The hryvnia currency plunged 37 percent in the first 3-1/2 months of this year due to political unrest but its valued stabilized following the NBU's rate hike on April 14.
    After the rate hike the hryvnia immediately strengthened to around 11 to the U.S. dollar from a low of 13 and was trading at 11.72 to the dollar today.
    Ukraine's inflation rate has been accelerating in the last five months, hitting 12.0 percent in June from 10.9 percent in May and 0.5 percent in February to the impact of the lower exchange rate, the start of economic reforms related to administrative and regulated prices and continuing tensions in the east of Ukraine, the central bank said.

     Despite accelerating inflation, the NBU pointed to signs of an improvement in market expectations that are underpinning the stability of the hryvinia.
     In particular, the central bank said there had been a net supply of foreign exchange worth US$500 million USD in the second quarter compared with a net demand of $1.8 billion in the first quarter, helping balance the interbank foreign exchange market.
   In addition, deposits in local currency had risen 3.3 percent, or by 7.1 billion.
    Earlier this month Valeria Hontareva, who took over as chair of the central bank in June, said the central bank expects Ukraine's economy to contract by 4.6 percent this year while the country's agreement with the International Monetary Fund forecasts a 5 percent contraction.
    She also told an investment conference in London on July 3 that she expects inflation of between 17 and 19 percent this year, above the government's estimate of 12 percent.

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