Ukraine keeps key rate unchanged as war fuels inflation

By Natalia Zinets

KYIV (Reuters) - Ukraine's central bank kept its key interest rate unchanged at a seven-year-high of 25% on Thursday and raised its 2022 inflation forecast to more than 30%.

Ravaged by Russia's Feb. 24 invasion, Ukraine's economy fell by around 40% year on year in the second quarter of this year, the central bank said, floating the possibility it could keep its key rate at 25% until the second quarter of 2024.

"The baseline scenario of the macroeconomic forecast envisages that the key policy rate will be maintained at 25% at least until Q2 2024," the National Bank of Ukraine (NBU) said in a statement.

The Ukrainian economy could shrink by a third in 2022 before recovering next year, and is expected to grow between 5% and 6% in 2023 and 2024, the central bank said.

It warned that a long war with Russia was the key risk to its forecast.

The rate meeting was held hours after the central bank abruptly devalued the hryvnia, the national currency, by 25% against the U.S. dollar to help cope with the impact of the war.

The previous rate of 29.25 had been set at the start of Russia's invasion nearly five months ago.

Central bank deputy governor Serhiy Nikolaychuk told a news conference that the devaluation would add 2-3 percentage points to inflation, a projection he said had been taken into account in Thursday's inflation forecast.

The bank could provide 400 billion hryvnia in direct support to the government without fuelling more inflation, and 225 billion of this sum was already allocated through the purchase of war bonds, central bank governor Kyrylo Shevchenko told the news conference.

He said that a new International Monetary Fund programme was expected next year and that Ukraine's cooperation with international partners would be a key factor in supporting the economy and contributing to its recovery after the war.

Inflation will slow to 20.7% in 2023 and to 9.4% in 2024 before returning to 5% the following year, the NBU said.

The central bank last met to discuss the key rate on June 2 and hiked it from 10% to 25%, a move that an adviser to President Volodymyr Zelenskiy said at the time was too high.

Shevchenko told reporters that Ukraine's foreign currency reserves would decrease to $21 billion by the end of the year.