* Frozen IMF $17.5 bln assistance programme expires in 2019
* Minister says relations with IMF on track
* Govt wants to balance need for reform with voter anger (Adds finance minister’s comment after meeting)
By Natalia Zinets
KIEV, Sept 6 (Reuters) - Ukraine’s central bank raised its key policy rate by half a percentage point on Thursday and said inflation could only be kept in check if the government secured more IMF aid.
The hike to 18 percent from 17.5 percent coincided with the arrival of an International Monetary Fund mission, with time fast running out for Kiev to secure more money under a $17.5 billion assistance programme that expires in 2019 but has been frozen since last year.
The finance minister later said the fact that an IMF mission had come to Ukraine sent a positive signal that relations between Ukraine and the fund were on track.
In trying to keep the economy on an even keel, Prime Minister Volodymyr Groysman’s Western-backed government is caught between needing to satisfy the IMF’s demands for a gas price hike and tight spending while trying to avoid a voter backlash in elections in 2019.
A slowdown in reforms has prevented the authorities from drawing IMF aid since April 2017, putting pressure on the hryvnia currency and curtailing Ukraine’s ability to borrow on capital markets.
Kiev has banked only $8.7 billion under the programme, and its debt obligations will peak in 2018-2020. The hryvnia has fallen 8 percent since the last rate-setting meeting on July 12 and foreign exchange reserves have fallen below the key international measure of three months’ worth of imports.
But prospects of higher gas prices prompted opposition-led rallies in Kiev this week. Opposition leader Yulia Tymoshenko, the early frontrunner in the race for the presidency, on Monday called for parliament to sack the government if prices were raised.
“Success in continuing cooperation with the International Monetary Fund remains the major precondition for bringing inflation down to the target,” the central bank said.
“New loans from the IMF, and related financing from other Ukrainian partners, are expected to boost the country’s macrofinancial stability and signal to other market players that Ukraine is making progress with reforms.”
Thursday’s rate rise was in line with market expectations, and the bank signalled its readiness to hike again if more risks to its inflation target - 2 percentage points either side of 6.5 percent - surfaced.
It said year-on-year consumer price inflation in August would be close to the 8.9 percent it eased to in July. But price pressures could rise “as the volatility of the hryvnia exchange rate increases, and next year’s presidential and parliamentary elections draw near”.
Ukrainian officials and their foreign backers are keen to stress the achievements of the current leadership, which took power in the aftermath of the 2013-2014 Maidan street protests that plunged the country into conflict with Russia.
But there is also frustration at the slowing pace of change and limited efforts to tackle entrenched corruption, and investors and the central bank have warned of the risks of crashing out of the IMF programme.
“The visit of the IMF mission is a positive signal in the relations between Ukraine and the fund,” Finance Minister Oksana Markarova said in a statement after meeting IMF officials, stressing Kiev had fulfilled most of the IMF’s conditions.
Ukraine has a long history of non-compliance with IMF assistance programmes.
But Groysman last Friday said his government was still searching for a compromise with the IMF on gas, and the central bank governor told a news conference he expected a new aid tranche to be paid this year. (Writing by Matthias Williams; Editing by Alison Williams and John Stonestreet)