Ukraine’s central bank lowers key rate to 16% in sharpest cut of war so far

By Olena Harmash

KYIV (Reuters) -Ukraine’s central bank cut its key interest rate to 16% from 20% on Thursday, its third consecutive easing this year as inflation continues to slow and the war-torn economy starts to recover.

Analysts had expected a rate cut as inflation has been declining faster than expected this year. But most expected a smaller reduction.

Governor Andriy Pyshnyi said the rate decision should be viewed in a broader context as the central bank had changed its approach, setting its key rate at 16%, the same level as its rates for overnight deposit certificates.

“One of the key messages is … to strengthen the role and meaning of the rate,” Pyshnyi told a media briefing.

“We see and react to a stable trend of inflation slowing. We understand that by the end of the year, we will approach at maximum the inflation target. But we also see tendencies that risks remain which could overturn the (inflation) trend next year.”

The central bank said it had lowered its 2023 annual inflation forecast to 5.8% from an earlier forecast of 10.6%.

In a statement, it said it saw room to potentially lower the rate again later this year, but it only saw limited scope for cuts in 2024. The economy is on track to grow 4.9% this year, up from a previous forecast of 2.9%, it said.

Deputy Governor Serhiy Nikolaichuk said the rate could be cut again to 15% in December. The central bank’s next monetary meeting is scheduled for Dec. 14.

Russia’s February 2022 invasion forced the central bank to hike its key rate to 25% and tighten monetary requirements to mitigate the damage to the economy as millions fled the country, logistics and exports were disrupted, key energy infrastructure was damaged and whole cities were occupied.

The economy shrank by about a third last year.

But Ukrainian businesses have adapted to wartime challenges and the economy has started recovering. Government data showed that gross domestic product grew 5.3% in the first nine months of 2023.

Pyshnyi said Western financial aid was a key factor that helped the central bank “to add oxygen to our businesses which demonstrate a fantastic ability to adapt”.

The total amount of foreign financial aid was expected at about $45 billion this year and would help the central bank maintain a high level of reserves and preserve stability in the foreign exchange market.

The central bank expected its reserves to reach $41.8 billion this year and grow to $44.7 billion next year.

Central bank officials expected the war with Russia to continue into the next year. The central bank forecast GDP growth to slow to 3.6% in 2024 after an expected 4.9% rise this year. Inflation is expected to quicken to 9.8% next year.

(Reporting by Olena Harmash; Editing by Tom Balmforth, Tomasz Janowski and Giles Elgood)