550-Basis Point Hike in Ukraine’s Central Bank Discount Rate

February 5, 2015

In addition to the increased key interest rate to 19.5% from 14.0% previously, monetary officials are “scrapping the practice of holding foreign exchange auctions (effective from February 5, 2015) and setting the indicative hryvnia exchange rate. The hryvnia exchange rate will be set by banks based on the objective parameters of market demand and supply.”  A statement from the Monetary Policy Committee said these actions are meant to counter rising inflation, now at some 25%.  This acceleration in the face of plunging domestic demand has been caused by the domestic currency’s quick loss of more than half of its value.  Ironically, the hryvnia dropped nearly 20% further today, but authorities hope that by aligning all Ukraine interest rates more closely with the discount rate and increasing the sensitivity of interest rates and the currency to market supply and demand, volatility will simmer down in coming weeks.  They expect inflation to settle under 20% later this year and reach single-digit levels by the end of 2016.  Real GDP, which tumbled 6.7% last year, is projected to contract by a further 4-5% in 2015. 

Copyright 2015, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.



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