Gontareva: For creating a stable situation in the economy.
Bloomberg/Kiev
Ukraine will pare the world’s highest benchmark interest rate once its currency stabilises after twin shocks from recession and war, the central bank chief said.
Policy makers raised borrowing costs to 30% on March 4 “only due to panic on the foreign-currency market,” Governor Valeriya Gontareva said in an interview in Kiev. The hryvnia, which has sunk 60% to the dollar in the past year, has gained or lost more than 15% in a single day on five occasions in 2015, data compiled by Bloomberg show.
“We introduced the rate for three months only, but believe me, it isn’t very interesting to keep it for three months,” Gontareva said in her office, a day after the International Monetary Fund approved $17.5bn of emergency aid for Ukraine. “If we feel the situation is calming down, we can call an ad-hoc meeting.”
The IMF package has been welcomed by investors after intensified fighting in eastern Ukraine and a second year of economic contraction sent the hryvnia and bonds to record lows last month. On top of higher borrowing costs, which are choking growth, other defensive measures from the central bank include capital controls and a temporary freeze on currency trading.
The central bank no longer being required to intervene on the currency market would be a sign it’s stabilising and policy makers’ earlier actions may be reviewed, according to Gontareva.
“When we really find equilibrium, when supply and demand are matched, it will be time for us to consider” a policy change, she said.
The hryvnia gained 1.9% Thursday and stayed almost unchanged yesterday as Ukraine started receiving a first $5bn tranche of assistance from the IMF. Those funds, to be split between the central bank and the Finance Ministry, are part of a total $40bn rescue package that includes bilateral loans from the US and the European Union and debt relief from private bondholders. Ukraine plans to use the aid to boost its reserves from the lowest level in more than a decade and help restart an economy that’s mired in a second year of contraction. Gross domestic product may have plunged 6.7% last year, according to the central bank, as the pro-Russian insurgency in the nation’s east ravaged its industrial heartland.
“The main idea is to create a stable situation in the economy, to create some net international reserves,” Gontareva said. “It’s the main target for us for the next four years.”
Ukraine’s central bank is sticking to an inflation forecast of 27% for this year, Gontareva said. Switching to inflation targeting, which was planned for 2016, needs preparation, she said. “We’ll be technically ready for inflation targeting before our cabinet meets the first prerequisite: a balanced budget.”
Ukraine’s regulator has almost completed the “cleaning” up of the banking industry, according to the governor.
“I see the light at the end of the tunnel,” she said. “Thirty-five banks represent more than 85% of our banking system, and the main work has been completed there.” She added that “the banking system is still bleeding, we’re still losing some private individual deposits.”
Gontareva said the central bank will remove restrictions on withdrawing deposits, introduced a year ago, when “we really finish the clean-up exercise, which will be soon.”
“Without macro stability, this clean-up exercise will bring us zero effect,” she said. “Only macro stability, only real-GDP growth, only a really stable situation on our FX market will bring us real stability in the banking sector.”
Peace in the east of the country is “mandatory” for Ukraine’s recovery, she said. “Stopping corruption is also a must. I believe reforms have started already. If they haven’t started, I’m a kamikaze here.”
