By Olena Harmash
KYIV (Reuters) -Ukraine’s central bank lowered its key rate to 22% on Thursday, announcing its first wartime rate cut in a move aimed at helping economic recovery.
The cut from 25%, where it was set in June 2022, had been expected by economists and analysts, with inflation slowing more quickly than expected this year.
“A fast slowdown in inflation and the stable situation on the foreign exchange market enable the start of a cycle of lowering the discount rate,” the central bank said in a statement.
“At the same time, lowering the discount rate against the background of maintaining macro-financial stability will support the recovery of the economy.”
Consumer price inflation slowed to 12.8% year-on-year in June, according to state statistics service data.
The central bank also lowered rates for deposit certificates by two percentage points to 18%, and on refinancing credits by three percentage points to 24%, the statement said.
Central bank governor Andriy Pyshnyi said Ukraine’s economy was proving resilient to the new challenges posed by the full-scale invasion launched by Russia in February last year.
That, he said, had prompted the central bank to improve its forecast for gross domestic product growth to 2.9% this year from the previous target of 2%. The central bank also improved its forecast for inflation, saying it expected the rate to slow to 10.6% this year after its earlier forecast of 14.8%.
NO GRAIN CORRIDOR
Deputy governor Serhiy Nykolaichuk said the central bank’s latest basic economic forecast had been drawn up with the expectation that the Black Sea grain export corridor, created under a U.N.-brokered deal that Moscow quit last week, will remain closed.
“Our baseline forecast is based on the assumption that the grain corridor will not function during martial law,” Nykolaichuk told a briefing.
He said alternative export routes via Central Europe would be key for Ukraine’s grain sector.
Pyshnyi said the central bank expected security risks to recede in the middle of 2024, creating opportunities to revive optimal logistics routes and increase production and harvests.
The central bank expects the economic recovery to quicken, with GDP forecast to grow by 3.5% in 2024 and by 6.8% in 2025. Inflation is expected to slow to 8.5% in 2024 and to 6% in 2025.
But Pyshnyi said uncertainty remained and cooperation with the International Monetary Fund was crucial.
Ukraine depends heavily on Western aid to finance budget spending. Kyiv has received nearly $27 billion of an expected $42 billion this year, and next year will need at least $37 billion to cover its budget deficit, the central bank said.
Foreign exchange reserves were at a record high of about $39 billion at the start of July, and the central bank expects them to ease to $38.3 billion by the end of 2023. The reserves are forecast to grow to $42.6 billion in 2024 and to $44.1 billion in 2025.
(Reporting by Olena Harmash; editing by Tom Balmforth)
