Ukraine Set to Hike Interest Rates Sharply in Face of Russia War

(Bloomberg) --

While central bankers around the world fret about the strongest inflation in decades, their challenge is nowhere near as great as the one facing Ukraine's Kyrylo Shevchenko and his colleagues.

As Russian troops bear down on Kyiv, Governor Shevchenko's central bank is poised hike its key interest rate on Thursday in a bid to stabilize the economy.

But the fog of war leaves economists struggling to predict how much it will tighten monetary policy. The base rate is currently 10%.

With Russian forces on the march, hundreds of thousands are fleeing the country and supply lines are being cut off, while in financial markets, government bond yields are soaring.

Against such a recessionary backdrop, economists are unclear how forcefully the central bank will respond.

“The situation is so surreal that I struggle to imagine what the central bank's decision will be -- whether they'll hike the rate to 14% or 15%,” said Mykhaylo Demkiv, an analyst at Ukrainian investment firm ICU.

Russia, whose assault has been greeted by a barrage of sanctions, the freezing of reserves and the targeting of its own central bank, doubled benchmark borrowing costs to 20% and imposed capital controls on Monday.

Ukriane has grappled repeatedly with Russian aggression since a revolution toppled Kremlin-backed leader Viktor Yanukovych in 2014. During the conflict that President Vladimir Putin fomented following his annexation of Crimea the same year, Ukraine hiked rates to as high as 30% and restructured its foreign debt.

As Russia launched its offensive last week, Ukraine's central bank rolled out capital controls that include limits on cash withdrawals. The central bank suspended foreign-currency trading.

The government on Tuesday sold 8.1 billion hryvnia ($277 million) of war bonds -- part of crowdfunding measures to raise cash to help the armed forces and civilians.

The World Bank said on Tuesday it is preparing $3 billion in funding for Ukraine as it works with the International Monetary Fund to support the country following its invasion by Russia.

In a sign of the economic challenges it faces as a result of the war, the government last week asked utilities to prioritize electricity made from natural gas in a bid to stockpile coal in case supplies are cut.

With Western military officials warning Russia is set to deploy more indiscriminate tactics to suppress resistance to its advance, disruptions to supply lines are looking increasingly probable.

Ally nations have vowed to continue tightening sanctions on Russia's economy in a bid to restrain it, but a plea from Ukrainian President Volodymyr Zelenskiy for fast-tracked membership of the European Union appeared to gain little initial backing.