Ukraine to cut its key rate following IMF loan approval next week - Reuters poll

KIEV (Reuters) - An expected new loan from the International Monetary Fund, slow inflation and looming recession likely will prompt Ukraine’s central bank to cut its key rate from the current 8% next week to help the economy recover after the coronavirus lockdown, a Reuters monthly poll showed on Thursday.

FILE PHOTO: The headquarters of Ukrainian central bank is seen in central Kiev, Ukraine, March 10, 2016. REUTERS/Valentyn Ogirenko

The IMF said its executive board would consider Ukraine’s request for a $5-billion stand-by arrangement on June 9. Kiev hopes the first tranche worth $1.9 billion will be disbursed next day and be used to finance the state budget deficit.

The Ukrainian central bank plans to review its key rate on June 11.

Six of 15 Ukrainian analysts, polled by Reuters, expect the rate to be cut to 7.0%; five others see it at 7.5%; and four contributors forecast 6.5%.

“The rate will be reduced since the central bank is now trying to coordinate its policy with the government, and there is a huge demand from the latter as the rate reduction will make loans cheaper in the domestic market,” said Konstantin Fastovets from the brokerage Adamant Capital, who expects a 1 percentage point cut.

He added that the authorities are struggling to underpin the economy, which may shrink by 15% in the second quarter.

According to the median forecast of the poll, Ukraine’s domestic product will decline by 10.2% in April-June. The State Statistics Service reported a 1.5% fall in the first quarter.

Oleksiy Blinov from Alfa-Bank Ukraine said that the bank had room for a more significant cut as inflation continued to slow far below its target of 5%.

Analysts forecast May inflation to slow to 1.9% year-on-year from 2.1% in April.

“In this regard, as well as the favourable situation on the foreign exchange market and the need to stimulate economic recovery after the removal of quarantine restrictions, we expect a reduction... by another 150 points to 6.5%,” Blinov said.

The bank has reduced its rate three times since the start of the year, when it stood at 13.5%.

A few weeks ago the government started lifting restrictions for business activity, which were imposed in March. As one of the recent steps it allowed railway operations to resume from June 1, internal flights will be possible from June 5, international flights from June 15.

Ukraine reports 25,411 coronavirus cases, including 747 deaths, as of June 4.

Reporting by Natalia Zinets; Editing by Chizu Nomiyama