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NBU cuts discount rate 100 basis points
Journal Staff Report

KIEV, June 12 – The National Bank of Ukraine said Friday it will cut the discount rate 100 basis points starting Monday amid signs that confidence has been returning to the battered financial sector.

The NBU will cut the rate at which it lends money to commercial banks to 11% effective Monday, down from 12%, arguing it has seen “certain signs of stabilization” on money markets.

The move ends the period of 18 months of the NBU robustly hiking key interest rates in response to rapidly growing consumer inflation in Ukraine. The move may help the economy to slow down its severe contraction this year.

The NBU argued that consumer price increases have slowed down this year, while the people’s run on bank deposits has eased over the past two months, and lending to the real economy has increased.

Ukraine’s consumer prices increased 0.5% on the month in May, compared with 2.9% monthly hike in January, reflecting efforts by the central bank to restrict money supply.

The move is designed to encourage lending in the economy, which has been suffering from a dramatic contraction since October 2008, responding to the global financial crisis and collapse in demand for steel, Ukraine’s main exports.

Although the rate cut is expected to have a positive impact on the economy, it has been hard to estimate the economy’s current condition as the government of Prime Minister Yulia Tymoshenko has restricted release of vital economic data since January.

President Viktor Yushchenko, Tymoshenko’s political rival who has been also cut off from having access to the economic data, last week estimated the economy had contracted 25% on the year in the first quarter.

Analysts said Tymoshenko has been restricting the release of economic growth data amid concerns the sharp contraction would result in criticism of the government and may reduce her rating ahead of presidential election.

Meanwhile, Tymoshenko, one of the two people in Ukraine that has full access to the data in addition to Oleksandr Turchynov, the first deputy prime minister and her close political ally, has been making conflicting statements on the economy.

Addressing domestic audience last month, Tymoshenko said the economy was on the way to recovery and would probably start growing in four months – by October - with steel prices showing steady growth.

But addressing an international audience in Kazakhstan two days later, Tymoshenko said Ukraine was likely to face economic challenges in 2009 and in 2010.

The NBU last time acted on the discount rate on April 30, 2008 by hiking the rate 200 basis points to 12% from 10% in reaction to growing consumer prices.

The hike came only four month after the same dramatic hike by 200 basis points in January 2008, from 8% to 10%, reacting to reports that consumer prices had increased to 16.6% in 2007.

The rate hiking decisions ended a period of 19 months - between June 2006 and January 2007 - when the NBU has been actually cutting discount rates in order to boost the economy. (tl/ez)




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