Ukraine Defies Surge in Inflation by Keeping Rates on Hold

(Bloomberg) -- Ukraine unexpectedly kept its benchmark borrowing rate unchanged, defying concerns over soaring inflation.

The central bank left its key policy rate at 7.5% on Thursday. That surprised most economists surveyed by Bloomberg who had predicted an increase to 8% after Ukraine saw its consumer price growth rise at Europe’s second-fastest rate behind Turkey.

Governor Kyrylo Shevchenko said the National Bank of Ukraine’s non-conventional measures had done their part to alleviate the crisis and instruments including long-term refinancing and interest-rate swaps would now be gradually retired.

“With economic activity recovering, they become irrelevant,” Shevchenko said during a news conference following the decision. “The phasing out of these instruments will provide the NBU with more control over inflation processes.”

While countries in the European Union’s east are quibbling about whether the recent spike in consumer prices will persist and whether it requires action, the picture is far clearer just beyond the bloc’s borders.

Ukraine, which saw annual price growth jump to 9.5% in May, has raised rates from a post-communist low twice since March. Now at a two-year high, inflation has exceeded the expectations of both analysts and the central bank.

Ukraine’s $5 billion IMF program, which has been frozen for months, remains a concern too. Cooperation with the Washington-based lender is key to maintaining financial stability.

There are factors that should help to counter the inflation surge, including an abundant harvest that could slow the advance of food costs and a stronger hryvnia. The currency has gained 5.3% against the dollar this year, making it one of the world’s top performers.

The central bank also said that it doesn’t see signs that underlying inflationary pressures will increase beyond its forecast.

“Although remaining high, inflation expectations of businesses and households have stabilized over past months,” the bank said in a statement.

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