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Ukraine hikes key rate to highest level in decade

Ukraine's central bank said Wednesday it will raise its key lending rate by a hefty three percentage points to its highest level in a decade, to rein in soaring inflation.

KIEV: Ukraine's central bank said Wednesday it will raise its key lending rate by a hefty three percentage points to its highest level in a decade, to rein in soaring inflation.

The surprise decision to raise the main lending rate to 12.5 per cent from 9.5 per cent effective Thursday comes just weeks after the economy skirted imminent bankruptcy thanks to the promise of immediate international aid.

But an escalating pro-Kremlin insurgency in Ukraine's economically vital eastern regions, and Russia's decision last month to cut gas shipments to Ukraine seem to have scared Western investors and put pressure on the ex-Soviet country's currency.

The National Bank of Ukraine (NBU) has forecast that consumer prices could grow by 17 per cent on an annualised basis this year.

It noted that the annualised rate had jumped to 12.0 per cent in June from 0.5 per cent in January -- a month before the ouster of a leader backed by Moscow in Kiev prompted Russia's seizure of Crimea and encouraged the separatist uprising.

The central bank noted that the jump in prices "was anticipated, considering the weakening of the hryvnia (local currency) exchange rate, the start of economic reforms... and the continuing tensions in the east."

On April 15, the bank had already hiked its reference refinancing rate to 9.5 per cent from 6.5 per cent.

"The timing of the decision to raise interest rates comes as something of a surprise... One explanation is that capital flight may have accelerated in recent weeks as the conflict in the east of the country has escalated," the London-based Capital Economics consultancy said in a research note.

Ukraine's Western-backed leaders breathed a sight of relief on May 1 when the International Monetary Fund offered Kiev a two-year $17.0-billion (12.6-billion) loan backed by another $10 billion of international funding.

"Taking a step back, though, the key point is that even with an IMF deal in place, Ukraine's balance of payments position remains extremely fragile," Capital Economics observed.

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