Ukraine Unexpectedly Hikes Rates to Combat Inflation Surge

(Bloomberg) -- Ukraine raised interest rates from a post-communist low -- surprising analysts who’d expected looser monetary conditions to be prolonged as another surge in coronavirus cases threatens the country’s recovery from recession.

In the first increase since 2018, the central bank lifted benchmark borrowing costs to 6.5% from 6% on Thursday -- as predicted by four of 12 economists in a Bloomberg survey. With the bank calling recent price pressure temporary, the majority had seen no change.

Given the “balance of risks and the significant rise in fundamental inflationary pressures seen in recent months, the National Bank of Ukraine’s board decided to raise the key policy rate,” the central bank said in a statement. “The NBU stands ready to raise its key policy rate more resolutely in order to curb fundamental inflationary pressures, stabilize expectations and bring inflation back to its target.”

Inflation has shot up to the highest level in more than a year -- exceeding the upper limit of the official target range, though drivers have included a government-mandated increase in household heating tariffs that the central bank can do little about.

Another rate hike is possible in April, according to Dmytro Sologub, a central bank deputy governor.

“We’ll look at the dynamics of several factors: from one side, faster inflation; from the other, a possible new lockdown, a new wave of the virus, delays in the program from the International Monetary Fund and turbulence on global markets,” he told a news conference.

Higher interest rates could be a political headache for President Volodymyr Zelenskiy, who appointed central bank Governor Kyrylo Shevchenko last year after complaining that borrowing costs were too high. He’s recently pledged to ensure Ukrainians have access to cheap mortgages.

But Thursday’s rate increase could help convince skeptics that the central bank under Shevchenko isn’t being unduly influenced by outside officials. Concerns over its independence have contributed to a months-long delay in the next tranche of the country’s $5 billion loan from the IMF.

The pandemic, meanwhile, is worsening once again. Zelenskiy has been criticized over the slow pace of vaccinations and lockdown measures have been tightened for a growing number of regions where infections are jumping.

Daily new infections nationwide topped 10,000 for the first time since December this week.

©2021 Bloomberg L.P.