June 6, 2019 / 11:38 AM / 20 days ago

UPDATE 1-Ukraine holds key rate at 17.5% to contain inflation risk

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By Pavel Polityuk

KIEV, June 6 (Reuters) - Ukraine’s central bank kept its main interest rate unchanged at 17.5% on Thursday, citing the need to contain inflation risks that had increased since the last rate decision in April.

Annual inflation has exceeded the central bank’s forecasts for the past two months, mainly because of temporary factors that included higher prices for some vegetables and fuel, the central bank said. Inflation stood at 8.8% in April and sped up again in May, it said.

“The decision was required to neutralize inflation risks, which have increased since the previous decision taken in April, and to attain the 5% inflation target next year,” the central bank said after announcing the rate pause.

In a statement, the central bank also said a delay to Ukraine’s negotiations with the International Monetary Fund made the economy more vulnerable and could increase financial market volatility.

Ukraine had hoped to secure IMF money in June under a $3.9 billion stand-by programme approved last December. The funds were intended to help the country maintain stability through presidential and parliamentary elections and to service heavy debt payments in 2019.

But President Volodymyr Zelenskiy, who took power in May, dissolved parliament and called for an election on July 21 that was originally scheduled for October. The IMF payments will only resume once a new government is formed.

“Deliberations regarding further financial support from the IMF and, as a result, related financing have been put off until a new government is formed,” the central bank said. “This is making the Ukrainian economy more vulnerable, and could increase financial market volatility.”

Citing improved inflation expectations, the central bank had cut its key rate by 0.5 percentage points in April, the first reduction in the past two years. It had either raised the rate or left it unchanged since mid-2017. (Reporting by Pavel Polityuk; writing by Matthias Williams; editing by Gareth Jones, Larry King)

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