(Bloomberg) — Ukraine kept borrowing costs on hold as policy makers said the economy will grow less than expected, while inflation will slow as security risks moderate in the second year of the country’s efforts to fight off Russia’s invasion.
(Bloomberg) — Ukraine kept borrowing costs on hold as policy makers said the economy will grow less than expected, while inflation will slow as security risks moderate in the second year of the country’s efforts to fight off Russia’s invasion.
The key policy rate stayed at 25% on Thursday, where it has remained since the central bank hiked by 15 percentage points to arrest a spike in inflation and a currency rout last June. The move was predicted by all economists in a Bloomberg survey.
The central bank raised reserve requirements for banks, while reiterating its intention to keep the benchmark unchanged at least until the second quarter of next year.
“The economic recovery ceased due to Russia’s terror attacks against energy infrastructure,” the central bank said. “As security risks subside, Ukraine will return to steady economic growth in 2024–2025.”
More importantly for investors, the central bank published updated economic forecasts that cut its 2023 outlook for economic growth to 0.3%, from 4% previously. Inflation is now expected to moderate to 18.7% this year, before slowing to 6.7% in 2025. Foreign reserves will also fall to $27 billion this year, from a previous estimate of $21.7 billion, it said.
The central bank said it’s seeking to encourage banks to raise interest rates on hryvnia assets to increase the share of term deposits, bolster the currency market and allow for the easing of restrictions for Ukrainians — as well as to rein in inflation.
In that light, it raised reserve requirements for bank deposits denominated in both hryvnia and foreign currencies.
War Impact
Policy makers struggled with the forecasts after Russia targeted civilian infrastructure, and particularly the power grid, in a bombing campaign that wrought damage across Ukraine and left millions of people and businesses without reliable supplies of electricity, heat and water.
Whether the new projections will be borne out depends on the hard-to-predict impact of further attacks on the power grid and potential offensives that both Kyiv’s forces and Russia’s are preparing.
The risk of lower-than-expected economic growth, in combination with easing inflation due to robust foreign aid, may prompt the central bank to start loosening monetary policy earlier than planned, according to Citi EM economist Ivan Tchakarov, who expects the benchmark to fall to 20% by year end.
While the central bank has said it doesn’t plan to start rate cuts this year, some policy makers suggested a shift toward dovish moves at the last rate meeting.
(Updates with raising reserve requirements for banks from third paragraph.)
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