January 31, 2019 / 12:30 PM / 20 days ago

UPDATE 2-Ukraine keeps rate unchanged to bring inflation down to target

(Adds quotes, details, background)

By Natalia Zinets

KIEV, Jan 31 (Reuters) - Ukraine’s central bank kept its main interest rate at 18 percent on Thursday, saying the pause in monetary easing was aimed at bringing inflation down to a target level of 5 percent early next year.

Ukraine has not lowered its key rate since May 2017 and some analysts polled by Reuters had expected a more benign inflation trend to prompt a cut, though others believed the bank would hold fire ahead of a presidential election on March 31.

Inflation slid into single digits at the end of last year, and Governor Yakiv Smoliy has previously described the rate as “very high”.

But the central bank “deems it necessary to maintain the existing reasonably tight monetary conditions in order to ensure that inflation returns to its target range in Q1 2020”, it said in Thursday’s statement.

“Any further changes to the key policy rate will depend on inflation developments, as well as on whether or not risks to price stability materialise.”

The central bank also announced a slight downward revision to its economic growth forecast for 2018 to 3.3 percent from 3.4 percent but kept its 2019 forecast unchanged at 2.5 percent.

It said uncertainty caused by Ukraine holding an election this year posed a risk to its forecasts, and that its assumptions were predicated on the authorities staying in a $3.9 billion aid programme with the International Monetary Fund.

The IMF and other foreign donors pumped billions of dollars into supporting Ukraine’s economy after Russia’s annexation of Crimea in 2014 and the outbreak of fighting in the eastern Donbass region.

But opposition candidates challenging President Petro Poroshenko at the ballot box want to cut household gas tariffs, which contravenes the terms of the IMF deal.

Eight of 15 analysts polled by Reuters had predicted an interest rate cut, while the other seven believed the central bank would keep the rate unchanged.

Inflation slowed to 9.8 percent year-on-year in the month of December.

The central bank left the door open for potential cuts further down the line, saying “the board sees reasons for launching a monetary easing cycle, as risks of inflation decrease steadily”.

The central bank expects the Finance Ministry to issue $2 billion in Eurobonds this year and is hopeful Ukraine can secure $2.5 billion of IMF money.

Non-residents have bought up to 5.5 billion hryvnias ($199 million) of domestic debt in January.

At a press briefing, Deputy Central Bank Governor Kateryna Rozhkova said this was helping boost foreign exchange reserves, “that is, to create a kind of buffer”.

$1 = 27.6020 hryvnias Writing by Matthias Williams; Editing by Alison Williams

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