Ukraine currency recovers after 46% interest rate hike
Kiev: Ukraine`s currency steadied today after heavy falls and after the crisis-hit country`s central bank unexpectedly raised the key interest rate by nearly 50 per cent to boost consumer confidence and stop spiralling inflation.
The local currency clawed back 60 kopeks to trade at 11.9 hryvnias to the dollar on the main interbank exchange.
The strong move came in response to the National Bank of Ukraine`s announcement yesterday that it was raising its main interest rate to 9.5 from 6.5 per cent.
The bank also upped the overnight rate at which it provides emergency funding to other lenders by 700 basis points to 14.5 per cent.
The hryvnia has recorded one of the worst performances among any emerging market by losing about 35 per cent of its value against the dollar since the start of the year.
The drop is explained in part by the National Bank of Ukraine`s decision to stop propping up the currency in order to meet one of the main conditions set by the International Monetary Fund for its release of urgent economic aid.
The Fund on March 28 announced the broad outlines of a USD 14-USD 18-billion package that could be disbursed over two years should Ukraine pursue painful and unpopular reforms.
The IMF rescue will form the heart of a broader package released by other governments and agencies amounting to USD 27 billion. The IMF board is widely expected to formally approve the aid at the end of the month.
But the Ukrainian bank is also trying to fight inflation that is expected to reach a rate of about 15 per cent this year.
Uncertainties linked to separatist tensions gripping the ex-Soviet country`s Russian-speaking southeast is adding to investor worries and contributing to further currency falls.
Some economist said the bank`s decision highlights the problems Ukraine`s economy is facing despite the promise of Western aid.
"Given the scale of the currency move and the size and scope of the likely tax and subsidy changes, last night`s interest rate hike is unlikely to stem the rise in inflation," said emerging markets economist Neil Shearing of Capital Economics.
"At the same time, tighter monetary policy will add to the pressures facing an economy that was already expected to contact by three per cent this year as a result of the political crisis and the austerity measures demanded by the IMF/EU."
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