* Ukraine's economy hit by conflict in the east
* Big rise in key refinancing rate takes effect on Friday
* IMF mission has extended visit as Kiev seeks loans
(Adds trader quote)
By Natalia Zinets
KIEV, Feb 5 Ukraine's hryvnia currency plunged
about 30 percent against the dollar on Thursday, traders said,
after the central bank abandoned the foreign currency auctions
that had effectively pegged the exchange rate.
The central bank scrapped the daily auctions, which had set
an unofficial peg for banks to follow, and also raised its main
interest rate to 19.5 percent on Thursday as it sought to avert
a Ukrainian financial collapse, brought ever closer by fighting
in the country's east and a lack of foreign funding.
With the hryvnia declining even before Thursday's drop, and
Ukraine's foreign exchange reserves falling to $6.4 billion -
barely enough to cover five weeks of imports - the bank has few
ways to revive an economy on the brink of bankruptcy.
The scrapping of the auctions was aimed at closing the gap
between the black market exchange rate and the official rate,
which the central bank said would eliminate market uncertainty.
But following the announcement, the hryvnia was trading at
24-25 against the dollar, down about 30 percent from Wednesday's
close, traders said.
According to Reuters data, the hryvnia was trading at 23.90
at about 1300 GMT.
"The market is increasingly active, but from the side of
buyers (of foreign currency). There are not many sellers. The
true level now is 24 or 25. I cannot say if there are real
deals, but they were the live quotes," said one trader.
"The official rate does not yet reflect the real picture,
it's far from it."
The central bank raised its key refinancing rate to 19.5
percent from 14 percent, to take effect on Friday, as it seeks
to curb annual inflation which hit almost 25 percent in
Announcing the measures, central bank governor Valeriia
Gontareva told a news conference: "There is still panic on the
market, connected with ongoing fighting."
The former Soviet republic desperately needs funds from
donors to fill an estimated $15-billion funding gap to withstand
the financial crisis, deepened by a surge in fighting in eastern
regions where pro-Russian rebels have seized new ground.
But analysts say the renewed fighting, which has all but
buried a September ceasefire, makes it more difficult for
lenders such as the International Monetary Fund (IMF) to offer
"If there is any worsening of the situation, the National
Bank is ready with the tools needed to calm the foreign exchange
market," Gontareva said.
She said the bank was forecasting consumer price inflation
this year of 17.2 percent and warned that inflationary and
currency devaluation risks would continue in the near term.
IMF TALKS TOUGH
Gontareva, a former top executive at Western banks who was
appointed soon after President Petro Poroshenko was elected last
May, said the bank had agreed terms with the IMF to boost
financial aid but gave no figures.
However the terms are unclear, and an IMF team is still in
the capital Kiev after extending its mission beyond Jan. 29, a
move seen by some analysts as a sign that talks on boosting its
financial support are tough.
Ukraine has already received $4.6 billion from the IMF as
part of a $17 billion aid programme, but is seeking to extend
that programme in terms of time and money.
Some analysts said that without a ceasefire, any foreign
financing from the IMF and others would be difficult to secure.
Kiev has said it wants to restore the ceasefire agreed with
the Moscow-backed rebels last September in the Belarussian
capital Minsk and accuses Russia of sending new troops and arms
to help the separatists take ground in eastern Ukraine.
Moscow denies arming the rebels and says it too wants the
ceasefire to hold.
Tim Ash, head of emerging markets research at Standard Bank,
said Russian President Vladimir Putin was betting that no amount
of Western financing would work unless the conflict was halted.
"This is just finger-in-the-dyke stuff. The conflict has to
be halted, period," he said in a note.
U.S. Secretary of State John Kerry arrived in Kiev on
Thursday for talks with Poroshenko and government leaders. A
senior State Department official said Kerry would offer U.S.
support for efforts by Ukraine to negotiate a new ceasefire.
Kerry also intends to provide an additional $16.4 million in
humanitarian aid to help civilians in eastern Ukraine, U.S.
Analysts said continued fighting ensured any move by the
central bank to secure the economy would fail.
"It's more about economic failings and the war situation at
this stage. Interest rates won't make any difference, just as
they are not (making a difference) in Russia," said Simon
Quijano-Evans head of emerging market research at Commerzbank in
(Additional reporting by Pavel Polityuk in Kiev, Katya
Golubkova and Lidia Kelly in Moscow, and Sujata Rao in London;
Writing by Elizabeth Piper; Editing by Timothy Heritage and