October 26, 2017 / 2:26 PM / a year ago

UPDATE 2-Ukraine central bank issues IMF warning after rate rise

(Adds finance minister comments, details)

By Natalia Zinets and Pavel Polityuk

KIEV, Oct 26 (Reuters) - The Ukrainian central bank on Thursday raised rates for the first time since March 2015 on a worsening inflation outlook and warned about the risks Kiev faces if it does not comply with its International Monetary Fund aid programme.

IMF disbursements have been held up by uneven progress on modernising the economy and eliminating corruption. These delays pose a risk to macroeconomic stability, the central bank said.

“The Ukrainian economy could become more vulnerable if external official financing under the EFF is delayed,” it said, referring to the IMF’s $17.5 billion cash-for-reforms bailout.

The bank raised its key rate to 13.5 percent from 12.5 percent, breaking a trend of gradual cuts since 2015, when it hiked the rate to 30 percent amid an economic crisis linked to political upheaval and a pro-Russian separatist insurgency.

The central bank said inflation has accelerated in recent months and new inflationary risks had emerged.

“Stricter monetary policy will help to reduce consumer price inflation and get closer to (inflation) targets in 2018,” it said, adding that it did not rule out raising rates further.

The bank raised its 2017 inflation forecast to 12.2 percent from 9.1 percent and its 2018 forecast to 7.3 percent from 6 percent. It said the government must continue to cooperate with the IMF and expects Ukraine to receive $3.5 billion from the Fund in 2018, including $2 billion in the first quarter of 2018.

Since the IMF bailout was agreed in 2015, its loans have replenished near-empty foreign currency reserves and helped pull Ukraine out of a two-year recession to post growth of 2.3 percent in 2016.

Finance Minister Oleksandr Danylyuk expressed confidence on Thursday that Ukraine would soon unlock further funding by quickly reaching an understanding with the IMF and World Bank on pension reforms and gas pricing.

“I think it (the IMF loan disbursement) could happen this year,” he told reporters at a separate briefing. “If it’s at the start of next year, that’s not a problem.”

To qualify for the next tranche, Ukraine must show it has passed pension legislation that complies with IMF-approved fiscal and social targets, as well as strengthen anti-graft and privatisation initiatives.

The government is also expected to adjust gas prices for households, but it has proposed an alternative pricing formula that is says is more fair.

Danylyuk said talks with the IMF about the formula were ongoing, but forecast they would successfully conclude in “one to two weeks.”

According to the central bank, an IMF mission is due to visit Kiev in November. (Writing by Alessandra Prentice; editing by Matthias Williams/Jeremy Gaunt)

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