Ukraine's central bank unexpectedly trims key rate to 14.5%

Most analysts and bankers had expected the central bank overseeing Ukraine's battered wartime economy to keep the main interest rate unchanged after cutting it to 15% in December. Governor Andriy Pyshnyi said the central bank saw grounds to accelerate plans to continue easing monetary policy and described Thursday's cut as "natural".

Ukraine's central bank lowered its key interest rate to 14.5% from 15% in a surprise cut on Thursday, citing slowing inflation, foreign currency stability, and improving prospects for receiving vital international financial aid. Most analysts and bankers had expected the central bank overseeing Ukraine's battered wartime economy to keep the main interest rate unchanged after cutting it to 15% in December.

Governor Andriy Pyshnyi said the central bank saw grounds to accelerate plans to continue easing monetary policy and described Thursday's cut as "natural". The central bank said in a statement that the rate trim would support economic recovery "without threatening macrofinancial stability".

The economy returned to fragile, limited growth last year after contracting by a third in 2022 when Russia launched its full-scale invasion. That recovery has been overshadowed by fears that Western aid for Ukraine is waning. The European Union passed a major four-year aid package this year, but a big U.S. package has been blocked for months by Republican members of Congress.

The financial assistance is needed to plug a gaping budget deficit this year, as the government pours its revenue into the defence of the country as the war enters a third year. The central bank expected Ukraine to receive more than $10 billion in foreign financial aid in March and April, helping to boost its foreign currency reserves.

Central bank officials said the funds were expected from the EU, the International Monetary Fund, the World Bank, and Canada. RISKS REMAIN

Pyshnyi told a briefing: "This fairly significant amount during such a short period in March - April, which we are counting on, does not in any way, unfortunately, eliminate the risks that we ran into at the start of the year." "Ukraine's needs for external financing for 2024 remain the same... it is $37 billion. The rhythmic and sufficient receipt of this aid is extremely important for Ukraine."

Kyiv was able to meet its spending needs so far this year due to efficient policy decisions, some saving, domestic debt borrowing and the adaptability of Ukrainian businesses, he said. Pyshnyi added that the expected aid was one of the reasons behind the central bank's decisions.

Inflation has also been slowing more quickly than initially forecast this year, the central bank said, pointing to February when it decelerated to 4.3% year on year. The central bank also said it had cut rates for three-month deposit certificates to 17.5% from 19% and interest rates on refinancing loans to 19.5% from 21%.

The central bank expects inflation to remain within its target of about 5% in the coming months, accelerating only moderately in the second half of the year. A protracted war with Russia would make it harder to keep inflation close to its target of 5% in 2025-26, it said.

It pointed to potential wartime risks such as unplanned additional budget funds being needed for the military, significant damage being wrought to port infrastructure limiting exports, and continuing disruption to land exports to the EU. Farmers and truckers in Poland have been blockading Ukrainian export routes via their shared land border, accusing their neighbours of muscling them out of their businesses.