Ukraine raises interest rates to 25% in first increase since Russian invasion

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Ukraine more than doubled interest rates to 25% on Thursday in a move to try to stem double-digit inflation and protect its currency, which has collapsed since Russia’s invasion.

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In the first interest rates intervention since Vladimir Putin’s troops attacked on 24 February, the Ukrainian central bank’s governor, Kyrylo Shevchenko, increased the benchmark interest rate from 10% to 25%.

It takes borrowing costs to their highest level since September 2015 – when Ukraine’s economy was reeling from Russia’s annexation of Crimea – and the highest in Europe.

The Russian invasion has devastated Ukraine’s economy, which the World Bank has forecast could shrink by at least a third this year. The war has forced businesses to close, destroyed infrastructure, blocked shipping routes and reduced whole towns to rubble.

Shevchenko called for talks with the International Monetary Fund on a new aid programme. The increase was criticised by an adviser to President Volodymyr Zelenskiy’s office, who said the rate was too high and dangerous to the economy during wartime. It was not clear whether he was speaking in a personal capacity.

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The National Bank of Ukraine had frozen its main rate 10% at the start of the invasion, but last week signalled it could resume regular monetary policy reviews as business activity partially recovered in safer parts of the country.

It is betting that a sharp rate rise will also nudge the government to lift the yield on domestic bonds, making assets held in its currency, the hryvnia, more attractive and preventing household incomes and savings from being eroded by inflation.

Inflation was already in double digits before the conflict began and climbed further to about 17% in May from 16.4% in April, according to central bank estimates.

It said inflation could double in 2022 from 10% in 2021, pushed up by rising global prices and the damage of the war on domestic production and supply chains.

The number of small businesses that had suspended operations in April fell to 26% from 73% in March, according to a survey by the European Business Association, the union of businesses operating in Ukraine.

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