Ukraine's Central Bank Increases Key Rate to 15.5% in Ongoing Hikes

By Olena Harmash

KYIV (Reuters) - Ukraine's central bank raised the key interest rate by one percentage point to 15.5% on Thursday, its third consecutive hike, with inflation continuing to rise so far this year due to wartime economic challenges, officials said.

The rate hike was in line with market expectations after January inflation reached 12.9% year-on-year. Consumer prices continued to rise in February, the central bank said, adding that inflation was expected to accelerate in the coming months.

Governor Andriy Pyshnyi said the rate increase was aimed at maintaining foreign exchange market stability, keeping inflation expectations under control, and gradually bringing inflation down to its policy target of 5%.

"Additional monetary tightening is needed to reverse the inflationary trend," Pyshnyi told a news briefing.

"From March 7, the National Bank will raise its key policy rate and other rates for its transactions with the banks by one percentage point."

The central bank said it would stand ready to take additional monetary measures if risks to price dynamics and inflation expectations continued to rise. It expects inflation to reach 8.4% this year and to slow to about 5% in 2026.

INFLATION PICKS UP

Inflation has picked up since last year due to growing food prices caused by 2024's smaller harvest and rising business costs, the latter arising from a national power shortage caused by Russia's airstrikes on the grid as well as staff shortages.

Millions of Ukrainians have been living abroad since Russia's 2022 invasion and the military continues to mobilise soldiers.

With the war in its fourth year, Ukraine remains crucially dependent on financial support from its Western allies to be able to maintain macroeconomic and financial stability.

Pyshnyi hailed a staff-level agreement with the International Monetary Fund on the seventh review of Ukraine's $15.5 billion lending program as a positive sign. Once approved by the IMF's board, the agreement would unlock about $400 million in a new tranche to Ukraine.

He said that planned foreign aid volumes this year would be sufficient to cover the budget deficit and maintain stability on the forex market.

But the central bank also said that geopolitical uncertainty was rising, elevating wartime risks for Ukraine, including a potential need for additional budget financing to fund defence and further damage to the country's infrastructure.

The United States, Ukraine's key ally, paused military aid and intelligence-sharing with Kyiv this week, heaping pressure on President Volodymyr Zelenskiy to cooperate with President Donald Trump in convening peace talks with Russia.

(Reporting by Olena Harmash; editing by Mark Heinrich)