KYIV, Aug 12 – Prime Minister Denys Shmyhal, unhappy about the central bank’s persistent interest rate hikes this year, has asked for a closer coordination of policies between the two institutions, a senior official said.

Oleksiy Liubchenko, the first deputy prime minister and the economy minister, said the National Bank of Ukraine’s interest rate hikes were “excessive” and may be hurting economic growth.

"We will start it [the discussion]. The Prime Minister has already expressed the wish before the governor of the NBU,” Liubchenko told Interfax-Ukraine. “I hope it will take place regarding the role and place of each institution in this country.”

The development may raise new concerns at the International Monetary Fund about the independence of the NBU as the government has been struggling with economic reforms ahead of talks over $5-bln loan in September.

The NBU raised its key interest rates 50 basis points to 8% on July 22, its third rate hike this year, amid attempts to cool off the inflationary pressure.

Ukraine’s consumer inflation hit 10.2% annualized rate in July, the highest level in years, suggesting that the NBU may move to raise the rates again later this year.

The developments come a week after a warning from Serhiy Verlanov, a former head of the State Tax Service, that the government’s rampant borrowing policy has been spurring inflation and forcing the NBU to raise interest rates. The policy may result in economic slowdown as higher interest rates make business loans and mortgages more expensive, he said.

Ukraine’s public debt increased almost 10% in the past seven months to $92.5 billion as of June 30, up from $84.2 billion as of November 30, 2020, according to the Finance Ministry. The debt shot up 18% over the past 25 months, the data show.

Liubchenko argued the NBU must stop raising interest rates because the causes of inflation are not associated with monetary factors.

"The NBU is conducting a competent policy in this [curbing inflation], but we must agree on it together so that it is consistent with the goals of the Strategy of Ukraine 2030 on GDP growth. This means that a balance should be sought between lending, inflation and the development of the real economic sector," Liubchenko said.

Liubchenko said it’s important that wages in Ukraine grow faster than inflation, and inflation must be predictable.

To coordinate the policies, the government will probably use the Financial Stability Council, an advisory body which includes the National Bank, the National Securities and Stock Market Commission, the Ministry of Finance, and the Deposit Guarantee Fund, Liubchenko said.

Ukraine’s economy contracted 4% on the year in 2020 but is expected to rebound 4% in 2021, the government said. The Kyiv School of Economics said recently the growth may slow down to 3.6% in 2021. (tl/ez)