Desperate Ukraine ups main interest rate to 30%

Mar 03, 2015, 3:33 PM EST
People walk past a board showing the day's exchange rates of the Ukrainian hryvnia against major currencies at a kiosk on February 21, 2015 in Kiev, Ukraine. The Ukrainian hryvnia has lost over 50% of its value since the crisis in Crimea last year and especially since fighting broke out between separatists and pro-government forces in eastern Ukraine.
Sean Gallup/Getty Images

Ukraine’s central bank raised its benchmark interest rate from 19.5% to 30%, the world’s highest, effective on Wednesday. Bloomberg writes that it is the fifth emergency move since the beginning of last week to arrest a plunge in the hryvnia as the nation moves closer to obtaining a bailout. The National Bank of Ukraine raised its refinancing rate to 30 percent from 19.5 percent, effective Wednesday, to “stabilize the situation on the money and lending markets,” Governor Valeriya Gontareva told reporters in Kiev. Policy makers are staggering from the turmoil wrecking the economy as the hryvnia, the world’s worst performer in the past year, spurs panic buying among shoppers and destabilizes banks. Before opting to push the key rate to the highest since 2000, the central bank in Kiev used tighter capital controls and a one-day freeze on currency trading to steady the hryvnia.

Reuters reports that the bank will also extend a rule obliging companies to sell 75 percent of their foreign currency earnings among other measures to help stabilise the hryvnia, which Gontareva said she hoped would return to a level of 20-22 to the dollar "quickly". A trader at one Ukrainian bank said it was too soon to say what effect the moves would have on the currency, as demand was low due to strict rules on foreign currency purchases for importers. "Everyone is waiting for the central bank to come onto the market. The rate it buys at will be the rate. It's not a real market when there are sellers, but the buyers are restricted by a pile of paperwork," the trader said.

The BBC notes that the increase comes as the government in Kiev is seeking a $17.5bn (£11.4bn; €15.6bn) assistance programme from the International Monetary Fund (IMF). Inflation is expected to hit at least 26% this year and the hryvnia has tumbled against the dollar. The currency has lost 80% of its value since last April, when pro-Russian separatists took up arms in the country's eastern Donetsk and Luhansk regions, a month after Russia annexed Ukraine's southern Crimea peninsula. Last week, the hryvnia hit a record low of 33.75 to the dollar before recovering some ground.

The conflict has taken its toll on Ukraine's economy, which is forecast to shrink by 5.5% in 2015. The interest rate increase is the second in two months, after the central bank raised the rate from 14% in February. On Monday night, Ukraine's parliament approved a package of reforms that could determine whether it will avoid economic meltdown in the coming weeks. They include changes to the tax and energy laws and the government's budget. The passing of the reform package was a condition for the IMF rescue package. The IMF's executive board will meet on 11 March, when it will make its decision. If it says yes, the first tranche of some $5bn will become available within days.