Ukraine raises key rate to 25% in first hike since Russian invasion

Ukraine sharply hiked its main interest rate to 25% from 10% on Thursday, tightening monetary policy for the first time since the Russian invasion to tackle double digit inflation and protect incomes and savings during the war.

The invasion has devastated the Ukrainian economy, which could shrink by at least a third this year as the war forced 40% of businesses to close, destroyed infrastructure, blocked shipping routes and reduced towns to rubble.

The National Bank of Ukraine (NBU) had frozen the rate 10% at the start of the invasion but last week signalled it could start revising the rate, as business activity partially recovered in safer parts of the country.

"The National Bank expects that raising the discount rate to 25% will be sufficient to ease the pressure on the foreign exchange market and stabilize inflation expectations, which in the long run will create the preconditions for the transition to a cycle of lowering the discount rate," it said in a statement.

Inflation was already in double digits before the conflict began and climbed further to around 17% in May from 16.4% in April, according to NBU estimates. The central bank said inflation could double in 2022 from 10% in 2021.

"The purpose of this decisive step, along with other measures, is to protect hryvnia incomes and savings, increase the attractiveness of hryvnia assets, reduce foreign exchange market pressures and strengthen the National Bank's ability to ensure exchange rate stability and curb inflation during the war," said the NBU statement about the hike.

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.