With inflation reaching 28.5 percent in January and the hrvynia's value dropping nearly by half since the start of the year, the National Bank of Ukraine has resorted to one of the few weapons it has left to stabilize the economy.
Effective March 4, the central bank is raising a key NBU interest rate on loans to banks, from 19.5 to 30 percent. National Bank Governor Valeriya Gontareva made the announcement during a news conference.
“After seeing the situation on the market, with food products getting pricier, we passed such a decision,” she said. “We have noticed a risk of inflation.”
The rate will remain until June 1 for banks wanting to borrow from the NBU.
“Using the tight quantitative indicators of money supply is based on the previously approved agreements with the International Monetary Fund experts,” reads the NBU’s press statement.
On Feb. 6, the regulator already raised its rate from 14 percent to 19.5 percent, also in a bid to rein in inflation.
Former NBU head Volodymyr Stelmakh and agricultural mogul Oleg Bakhmatyuk criticized Gontareva for the tight monetary policy that will dampen commerce. “I think the central bank’s rate should be lowered,” Stelmakh said.
But the central bank obviously feels it has no other choice than to put the interest rate above the inflation rate.
This year, the NBU plans to print up to Hr 91 billion, or $3.6 billion, mostly to keep enough in the state fund that guarantees consumer deposits under Hr 200,000 for a banking sector in crisis.
Among other measures, the regulator will restrict the financial support it provides to the Naftogaz, an energy giant that is generating huge deficits, up to $1 billion a month.
More than 50 activists protested near the National Bank headquarters on March 3 as Gontareva prepared to deliver the rate increase message. They want the governor’s resignation. Protesters blame the NBU for hryvnia devaluation.
The hryvnia went from 19 against the U.S. dollar in January to 25 on March 3. At its record low, the currency dipped to 36 to the dollar.
Inflation targeting is an approach prescribed by the International Monetary Fund, Ukraine’s key foreign lender counted on for $17.5 billion in low-interest lending over the next four years.
Kyiv Post associate business editor Ivan Verstyuk can be reached at [email protected].
