Ukraine: Central Bank raises interest rate amid deteriorating economic situation
November 13, 2014
At its 13 November monetary policy meeting, the National Bank of Ukraine (NBU) decided to raise the discount rate by 1.5 percentage points from 12.50% to 14.00%. The decision represented the third rate increase this year and the discount rate is now at the highest level since 2001.
In its accompanying statement, the Central Bank highlighted the dire situation that Ukraine’s economy is in. The Bank stated that annual inflation accelerated from 0.5% in January to 19.8% in October, driven by, “increases in administered prices and tariffs (by 25.8% y-o-y) due to the implementation of unpopular but much-needed reforms, as well as the depreciation of the hryvnia exchange rate against the US dollar.” Moreover, the Bank noted that worsening expectations amid the political upheaval and conflict in the country, combined with external imbalances, facilitated the depreciation of the hryvnia by 58.9% from January to October.
Regarding the domestic economy, the Bank commented that, despite the substantial reform efforts the government and the NBU have undertaken, key economic indicators signal a continued decline of Ukraine’s economy. Aggregate industrial output has waned as a large number of businesses in Eastern Ukraine are unable to operate and trade restrictions with Russia have reduced external demand for exports. Further, pessimistic expectations have been exacerbated by the military conflict, manifested by the acceleration of, “the outflow of deposits from banks and demand for foreign currency in recent months.”
Looking forward, the Bank expects inflationary pressures to remain high until the beginning of 2015, amid worsening market expectations and continued downward pressures on the hryvnia. Furthermore, the Bank expects that an increase in the discount rate will not have a large impact on the real sector as, “bank lending activity remains low due to heightened risks of business environments.” Under these circumstances, the Bank decided the appropriate action was to increase the discount rate to 14.00%.