Tags: currency | Ukraine | Russia | bailout

Ukraine Central Bank Raises Discount Rate to Support Hryvnia

Monday, 14 April 2014 03:49 PM

Ukraine’s central bank raised its discount rate to halt the plunge of the hryvnia, the world’s worst-performing currency this year, as the government races to seal a bailout deal and battles separatist unrest.

The central bank in Kiev raised the rate to 9.5 percent from 6.5 percent, the first change in the benchmark since August, it said in a statement on its website today. Policymakers cited tensions in the money market and risks to price stability.

“In order to curb inflation and balance the situation in the money market, the central bank’s board deems it necessary to take steps toward increasing the intrinsic value of the national currency,” according to the statement.

The country is facing its third recession since 2008, a record hryvnia decline and dwindling reserves as pro-Russia protests in its eastern industrial heartland turn deadly, while NATO estimates that 40,000 Russian troops are massing in combat readiness on its border.

The hryvnia reversed earlier losses to trade little changed at 12.7 per dollar after the rate decision. It has weakened 35 percent against the dollar this year, the most among more than 170 currencies tracked by Bloomberg. The central bank has refrained from market intervention since February as reserves plunged to $15.1 billion from $31.7 billion in April 2012.

Hryvnia Forecast

The hryvnia is set to strengthen as the government obtains international financing and fights speculation, central bank Governor Stepan Kubiv said.

The monetary authority sees this year’s average hryvnia rate near the government forecast of 10.5 per dollar, Kubiv said in an interview in Washington yesterday. Reserves, at a nine- year low, will increase by the end of the year as international loans arrive, he said.

“There is a speculative element in the hryvnia rate,” Kubiv said during the spring meetings of the International Monetary Fund and the World Bank. “The hryvnia’s fundamental rate is much stronger.”

The central bank also raised its overnight rate on refinancing loans secured with Ukrainian state securities to 14.5 percent from 7.5 percent and its rate on overnight certificates of deposit to 4.5 percent from 1.5 percent, it said in a separate statement.

IMF Accord

“The fate of their currency is in the hands of both Russia and the IMF,” Neil Azous, a founder of Stamford, Connecticut-based research company Rareview Macro LLC, which advises investors, said in an interview. “If an investor is exposed to either Russian or Ukrainian assets, they will continue to be impaired regardless of what actions are taken by those governments to stem losses.”

The government sealed a preliminary accord with the IMF last month for as much as $18 billion in loans in the next two years, unlocking $27 billion in international financing. The first payments will arrive “shortly,” Kubiv said, following a meeting with Christine Lagarde, the head of the Washington-based lender.

“We are moving fast,” Kubiv said. “In the nearest future, we will get the result we want.”

Ukraine’s central bank wants to switch to inflation targeting in a year, Kubiv said. While the pace of consumer-price increases may exceed 10 percent this year, the rate may fall to 3 percent to 5 percent in 2015 after the country’s financial markets stabilize, exports rise and imports decline because of the hryvnia depreciation, Kubiv said.

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Ukraine's central bank raised its discount rate to halt the plunge of the hryvnia, the world's worst-performing currency this year, as the government races to seal a bailout deal and battles separatist unrest.
currency, Ukraine, Russia, bailout
Monday, 14 April 2014 03:49 PM
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