(Bloomberg) -- Ukraine’s central bank left interest rates unchanged for a second straight meeting in a sign that policymakers won’t tolerate higher inflation despite growing strains on the war-time budget.
The National Bank of Ukraine left its key policy rate unchanged at 13%, it said on Thursday. The move matched the estimates of all seven economists in a Bloomberg survey.
The decision comes after Ukraine secured a $1.1 billion aid payment from the International Monetary Fund following what Prime Minister Denys Shmyhal described as “difficult” talks in Kyiv last week.
The central bank has come under growing pressure to allow inflation to run higher in a bid to increase revenue for the cash-strapped budget. The country is facing a $15 billion shortfall in external financing next year as it seeks to keep its economy afloat and repel Russia’s full-scale invasion, now into its third year.
A steady influx of foreign aid and tight monetary policy have kept inflation relatively contained. But the hryvnia’s 8% decline so far this year now threaten to undermine price stability, prompting the central bank to be more cautious.
Policymakers cut the key rate by two percentage points in the first half of this year. Inflation accelerated more than expected to 7.5% in August from 5.4% in the previous month.
“This decision will help gradually bring inflation back to the target of 5% in the coming years” and support the foreign-exchange market, the central bank said in a statement.
The latest inflation report, indicating that consumer price growth accelerated by 2.1 percentage points in August, reinforced policymakers’ stance. In a statement following that data release, the central bank acknowledged that “fundamental” inflation pressures had increased more than expected due to a lower harvest and higher business costs resulting from the war.
The central bank also increased Thursday the ratio for lender’s mandatory provisions by 5 percentage points from Oct. 11 and allowed banks to cover as much as 60% of them with benchmark domestic government bonds.
“The combination of these measures will increase the flexibility of banks in managing their liquidity and stimulate additional demand for domestic government debt securities, which will strengthen the government’s ability to raise the necessary funding on the domestic debt market,” the central bank said.
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