After hefty currency fall, Ukraine raises key interest rate

AP News
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Posted: Feb 05, 2015 11:36 AM
After hefty currency fall, Ukraine raises key interest rate

KIEV, Ukraine (AP) — Ukraine's currency plunged Thursday prompting the country's central bank to raise a key interest rate by a whopping 5.5 percentage points.

The rate hike to 19.5 percent was a response to the 46 percent slide in the hryvnia against the U.S. dollar earlier on Thursday. A plunging currency can prompt runaway inflation by making imports more expensive.

The move appears to have eased the pressure on the currency somewhat and it was trading 18 percent lower at 18 hryvnias per dollar in early evening trading.

The hryvnia has faced intense selling pressure for over a year, largely because of the ongoing fighting in eastern Ukraine where, according to President Petro Poroshenko, Kiev spends up to 7 million euros ($8 million) a day fighting Russia-backed separatists.

Unlike the Russian ruble, another much-battered currency, the hryvnia does not float freely, creating a discrepancy between the official exchange rate, the rate on high street and on the black market. Alongside the rate hike, the central bank gave more room for the hryvnia's exchange rate such and scrapped daily foreign currency auctions.

"The National Bank is going to implement stricter monetary and credit policies in order to provide a stable and controllable development of the market situation," the bank said in a statement, saying that the bank was forced to act in the view of the galloping inflation which was higher nearly 25 percent year on year in December.

Ukraine has received $4.6 billion from the International Monetary Fund as part of a $17 billion aid package but it is seeking more funding as the ongoing conflict in the east shows no signs of ending. The country's foreign currency reserves are just $6.4 billion while its GDP is due to decline by 5 percent this year after an estimated 6.7 percent drop last year.

Also Thursday, the central bank said the country's gold reserves diminished by about nine percent, to $6.42 billion, over the past month.

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Nataliya Vasilyeva in Moscow contributed to this report.