December 12, 2019 / 1:37 PM / a month ago

Ukraine central bank cuts key rate to lowest in two years

KIEV (Reuters) - Ukraine’s central bank sharply cut its key interest rate to 13.5% from 15.5% on Thursday, its lowest level in two years, thanks to slowing inflation, a strengthening hryvnia and the prospect of new loans from the International Monetary Fund.

FILE PHOTO: Ukrainian hryvnia banknotes are seen in a photo illustration shot in Kiev, Ukraine, August 6, 2014. REUTERS/Konstantin Chernichkin/Ullustration

The hryvnia has been the best performing emerging market currency this year, up 17% thanks to an unprecedented influx of foreign money into local bonds offering higher yields.

That has helped push down inflation and allowed the central bank to start monetary easing.

Interest rates have been in double digits since Ukraine plunged into turmoil following Russia’s annexation of Crimea in 2014, but have been cut five times this year.

Ukraine’s economy also received a confidence boost after the government secured provisional agreement with the IMF for a new loan deal on Saturday, though disbursement is conditional on the government’s performance on reforms.

Exports driven by a record grain harvest and external borrowing by Ukrainian companies have also helped strengthen the hryvnia, which stood at 23.6 to the dollar on Thursday, according to the official rate.

Inflation has slowed to 5.1% year-on-year in November, which is a sharper drop than the central bank had expected.

“The NBU speeds up the monetary policy easing, as the rapid appreciation of the hryvnia makes inflationary pressures decline faster than expected,” the National Bank of Ukraine said in a statement.

Speaking at a press conference after the rate cut, Central Bank Governor Yakiv Smoliy said he expected the IMF to take a final decision on disbursing loans by the first quarter of 2020.

He said minor technical issues needed to be resolved first, including how to structure legislation that would make it illegal for insolvent banks to be returned to their former owners.

The IMF has sought reassurance that Ukraine will make a serious effort to claw back money from banks which have been rescued in bailouts or whose depositors have had to be compensated.

It also wants to make sure that the 2016 nationalisation of Ukraine’s largest lender, PrivatBank, will not be reversed.

Until 2016, PrivatBank had been owned by one of the country’s wealthiest tycoons, Ihor Kolomoisky, who has challenged the nationalisation in court. A ruling on one of the closely-watched cases is expected next week.

Kolomoisky owns the TV station that launched President Volodymyr Zelenskiy’s political career as the star of a sit-com.

The central bank last month also accused Kolomoisky of paying protesters to demonstrate outside its building to disrupt its work and “create chaos”. The tycoon rejected the allegations.

In Thursday’s statement, the central bank said the “risk of rising threats to macrofinancial stability persists because of court rulings and pressure on the NBU.”

Additional reporting by Karin Strohecker in London; Writing by Matthias Williams; Editing by Peter Graff

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