Ukraine currency recovers after 46% interest rate hike

Ukraine's currency steadied on Tuesday from heavy falls after the crisis-hit country's central bank unexpectedly raised its key interest rate by nearly 50 percent to boost consumer confidence and stop spiralling inflation. The local currency clawed back about 50 kopeks to trade around 12.0 hryvnias to the dollar on the main interbank exchange. The strong move came in response to the National Bank of Ukraine's surprise announcement on Monday that it was raising its main interest rate to 9.5 percent from 6.5 percent. Kiev's central bank also upped the overnight rate at which it provides emergency funding to other lenders by 700 basis points to 14.5 percent. It cited "the tense situation on the monetary market, which reflects worsening market expectations... against the backdrop of current social and political events". The hryvnia has recorded one of the worst performances among any emerging market by losing about 35 percent of its value against the dollar since the start of the year. The central bank said it was also acting out of fears that inflation was growing even faster than the projected annual rate of 15 percent. It noted that consumer priced had grown 3.4 percent in March after seeing a 1.2-percent rise in February. "The central bank's main goal is demonstrate its ability (to) control the currency market and ensure stability. This would have an important macroeconomic effect," said Kiev's Razumkov Centre economist Vasyl Yurchyshyn. The drop is explained in part by the National Bank of Ukraine's decision to stop propping up the currency in order to meet one of the main conditions set by the International Monetary Fund for its release of urgent economic aid. The Fund on March 28 announced the broad outlines of a $14-$18-billion (10.1-13.0-billion-euro) package that could be disbursed over two years should Ukraine pursue painful and unpopular reforms. The IMF rescue will form the heart of a broader package released by other governments and agencies amounting to $27 billion. The IMF board is widely expected to formally approve the aid at the end of the month. But the Ukrainian bank is also trying to fight inflation, which is expected to reach a rate of about 15 percent this year. Uncertainties linked to separatist tensions gripping the ex-Soviet country's Russian-speaking southeast is adding to investor worries and contributing to further currency falls. Some economists said the bank's decision highlights the problems Ukraine's economy is facing, despite the promise of Western aid. - 'A signal to the IMF' - A rise in the benchmark rate is likely to put still more pressure on an economy that is already expected to contract by at least three percent this year. But Ukraine must also improve consumer sentiment and calm social tensions that are at a high following Russia's annexation of Crimea and worries that the Kremlin may eventual send its troops into the heavily Russified swathes of southeast Ukraine. Some economists called the bank's move necessary but insufficient. "Given the scale of the currency move and the size and scope of the likely tax and subsidy changes, last night's interest rate hike is unlikely to stem the rise in inflation," said emerging markets economist Neil Shearing of Capital Economics. "At the same time, tighter monetary policy will add to the pressures facing an economy that was already expected to contact by three percent this year as a result of the political crisis and the austerity measures demanded by the IMF/EU." Moscow's VTB Capital investment house agreed that the bank appeared to acting "in advance of the unwinding spike in inflation caused by both hryvnia devaluation and the planned increase in domestic gas prices for all categories of users." VTB Capital added that Kiev may have wanted "to send a new signal to the IMF... on its readiness to make its policies more market-based/oriented."