Ukraine central bank to cut rates as coronavirus recession looms: Reuters poll

KIEV (Reuters) - Ukraine’s central bank is likely to cut its main interest rate this week to make loans cheaper for businesses and minimise the severity of a looming recession caused by the coronavirus pandemic, a Reuters poll showed on Tuesday.

Eight out of 16 analysts expect a rate cut to 9% from 10% at the next policy meeting on April 23. Three see a more moderate reduction to 9.5%, while the other five think the rate will remain unchanged.

Strict lockdowns on businesses and the movement of people will cause the economy to contract by 4.8% this year, according to the government’s estimate, the first such drop since 2015 and a big swing from an earlier forecast of 3.7% growth.

The looming recession has prompted President Volodymyr Zelenskiy’s government to ask the International Monetary Fund for an $8 billion loan package, which remains conditional on parliament passing a banking reform bill.

As well as needing to support the economy, the central bank may also have the headroom for more rate cuts because hitherto tight monetary policy and low energy prices have brought inflation down to 2.3%, below its target range of around 5%.

“The current low inflation rate amid the strengthening hryvnia exchange rate and low oil prices, and most importantly - a decrease in business activity due to quarantine, create certain prerequisites for cutting the central bank key rate in order to support the economy,” said Oleh Klimov from Raiffeisen Bank Aval.

The IMF wants parliament to pass a law that prevents former owners of banks declared insolvent from regaining their assets.

The law is seen against the interests of Ihor Kolomoisky, one of the country’s wealthiest tycoons. Lawmakers, some of whom are Kolomoisky’s associates, have saddled the bill with more than 16,000 amendments, potentially delaying its approval.

The result of this uncertainty will likely prevent the central bank from cutting its key rate more sharply, according to Olena Bilan from the investment company Dragon Capital, who expects a cut to 9%.

“Low inflation and the stabilization of the hryvnia leave the potential for lowering rates by 200 (basis points), but the uncertainty around voting for the banking law, which remains the key condition for obtaining financing from the IMF, limits this potential,” she said.

At its last monetary policy meeting on March 13, the central bank cut its key rate to 10% from 11%.

Editing by Matthias Williams/Mark Heinrich