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Financials

UPDATE 2-Ukraine central bank cuts key interest rate sharply as recession looms

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KIEV, April 23 (Reuters) - Ukraine’s central bank cut its main interest rate for the seventh time in a row on Thursday, to 8% from 10%, to support the economy as it lurches towards recession due to the coronavirus pandemic.

The cut is sharper than the expectations of a Reuters poll of analysts.

Strict lockdowns on businesses and people will cause the economy to contract by 5% this year, according to the central bank’s revised estimate, the first such drop since 2015 and a big swing from an earlier forecast of 3.5% growth.

“The negative impact of the pandemic on the Ukrainian economy is expected to be relatively short-term, but quite powerful,” Central Bank Governor Yakiv Smoliy told an online briefing after the rate decision, which takes effect on Friday.

“Our goal is for banks to be able to help the Ukrainian economy get back on its feet as soon as possible after the quarantine is over,” he added.

The central bank expects the economy to contract 0.5% in the first quarter of 2020 and be hardest hit by the coronavirus pandemic in the second quarter. It expects growth to revive to 4% in 2021.

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.

Smoliy expects the government to sign an agreement with the IMF in May and the first loan tranche worth $2 billion to be disbursed later that month or in early June.

“If the signing of the programme with the IMF is postponed to a later date, it will be very difficult for the Ministry of Finance to finance budget expenditures,” he said.

The central bank has headroom for 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%.

Smoliy expected inflation to remain below 3% in April.

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

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

The law is seen as 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 stalling its approval.

But Zelenskiy’s party pushed through changes to voting on legislation last week, in a bid to prevent lengthy delays. (Writing by Matthias Williams; editing by Philippa Fletcher, Kirsten Donovan)

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