Ukrainian Central Bank Cuts Rates Third Time This Year As Inflation Slows

KIEV, Ukraine -- Ukraine’s central bank reduced the benchmark interest rate by three-quarters of a percentage point, its third reduction this year, as inflation slows.
The Natsionalnyi Bank Ukrainy cut the rate to 7.75 percent, the lowest since June 2004, to boost lending to companies and spur economic activity, according to a statement released yesterday.

The regulator reduced the rate by 1 percentage point to 8.5 percent July 7. The new rate takes effect today.

Ukraine’s inflation rate fell for a fifth month in July, dropping to 6.8 percent, the lowest since June 2006, the state statistics committee said Aug. 6.

The government expects a rate of about 9 percent this year, after successive governments have failed to cut the rate to less than 10 percent since 2003.

“There is certain improvement of the macro-economic situation,” the bank said in the statement. “Still, positive trends have not spurred lending yet as the financial situation of many potential corporate borrowers remains weak, while loans are quite expensive.

So, in order to stimulate improvements in the economy” the bank cut the rate.

The economy contracted 15.1 percent last year, the steepest drop since 1994, as the global financial crisis cut demand for Ukraine’s exports and weakened the currency.

Gross domestic product grew 4.9 percent in the first quarter, the first expansion since the third quarter of 2008, helped by a recovery of demand on world markets.

“At the current levels of hryvnia liquidity in the system the central bank’s rate cut may not translate into an equivalent reduction in the cost of real sector loans,” said Iryna Piontkivska, an economist at Troika Dialog in Kiev.

Many banks prefer to buy government debt and central bank deposit certificates, rather than making loans, Piontkivska said.

At the same time, many companies don’t want to borrow at current interest rates because “expectations of revenue growth are moderate,” she said.

Ukraine’s hryvnia strengthened to 7.8885 against the dollart, compared with 7.8900 yesterday,