(Bloomberg) -- Ukraine’s central bank kept borrowing costs unchanged at 25% even as a barrage of Russian missile attacks across the war-battered nation have further imperiled the economic outlook.
Policy makers have repeatedly said they won’t lower the key rate until 2024, though Governor Andriy Pyshnyi said last week that the bank would likely cut its economic outlook after Russia escalated strikes against the country’s energy system.
“An extended full-scale war by Russia and escalating terrorist attacks on the country’s critical infrastructure are the key risks for Ukraine’s economic development,” the National Bank of Ukraine said Thursday in a statement.
The decision to keep the rate unchanged “will enhance monetary transmission, support exchange rate stability, and gradually slow inflation in 2023,” the bank said. It also tightened reserve requirements for banks.
The Ukrainian economy, battered by the invasion and occupation of a swathe of territory, faced another blow after Russia shifted to targeting the nation’s energy infrastructure. Ukraine was forced to introduce rolling blackouts. The government said Russia damaged 40% of Ukraine’s energy facilities and urged allies to provide additional air-defense systems.
The damages prompted economists to scale back their outlook. Kyiv-based Dragon Capital now sees Ukraine’s economy contracting 32% this year, from 30%.
Prices climbed 26.6% in October, though the acceleration was less than estimated, the central bank said. Inflation will begin easing in the second quarter of next year, with power shortages potentially adding up to 2 percentage points to price growth next year, according to its estimates.
The bank expects to halt direct financing of the budget in 2023.
Required reserve ratios for hryvnia and foreign current accounts were increased by 5 percentage points to 5% and 15% respectively, the bank said. The move will take effect in January.
The central bank sees no grounds to return to a floating exchange-rate policy so far, as market supply of foreign currency remains fragile amid strong demand. At the same time, policymakers vowed to deliver on a promise to ease capital controls for investors in Ukraine’s hryvnia-denominated government bonds starting from April.
--With assistance from Daryna Krasnolutska.
(Updates with more details on CPI outlook in the 7th paragraph, central bank’s plans in the last)
©2022 Bloomberg L.P.
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