Ukraine holds interest rate at 7.5% despite inflation jump in May

The central bank started tightening monetary policy in March


KYIV- Ukraine's central bank held its main interest rate at 7.5% on Thursday despite surging inflation but said it was prepared to raise rates again if inflation did not ease back into its target range.

The National Bank of Ukraine did, however, announce scaling back some anti-crisis measures by reducing the maximum maturity of refinancing loans and reducing interest rate swap auctions from twice a month to once a month.

Doing so would give the central bank more tools to restrain inflation, it said, adding that an expected strong harvest and the impact of monetary policy would also put the brakes on price rises.

Analysts had been divided on whether the central bank would raise its rate again this week as it balances the need to restrain inflation with helping the economy out of recession, a Reuters poll showed on Tuesday. 

Inflation jumped to 9.5% in May, which the NBU said was higher than its forecast and nearly twice as high as its target range of around 5%.

"The NBU is ready to raise its key policy rate further if stronger underlying inflationary pressures and worsening expectations pose a threat to meeting the 5% inflation target in 2022," the central bank said a statement.

Deputy Governor Dmytro Sologub in a briefing added that current monetary policy was still rather soft. 

The central bank started tightening monetary policy in March after bringing interest rates to a historic low last year to support an economy reeling from the coronavirus pandemic.

A stuttering reform programme has prevented the government from securing more IMF loans under a $5 billion programme agreed last year, though President Volodymyr Zelenskiy told Reuters he expected new loans in the autumn. 

Ukraine has lagged behind other European countries in vaccinating its 41 million people, and the slow rollout was one of the reasons for the central bank to cut its growth forecast this year to 3.8% from 4.2%.

"As before, the spread of the COVID-19 pandemic remains the key risk," the statement said.

(Writing by Matthias Williams; Editing by Steve Orlofsky) ((;))

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