Ukraine hikes interest rate amid tanking economy | Business| Economy and finance news from a German perspective | DW | 03.03.2015
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Ukraine hikes interest rate amid tanking economy

The Ukrainian economy is tanking, Poland is worried a major wave of refugees could leave Ukraine, a major bank has failed, and inflation is running high. The central bank has responded with a massive interest rate hike.

The Ukrainian central bank is fighting a collapse in the value of the country's currency, the hyvnia, with a huge interest rate hike. Its benchmark refinancing rate would be raised to 30 percent from 19.5 percent, the bank announced Tuesday in Kyiv.

Central bank chief Valeriia Gontareva said the step was necessary because of the "strong increase in inflation risk" due to the "negative consequences of the panic in the foreign exchange market."

A higher interest rate makes a currency more attractive for foreign exchange holders considering investing in hryvnias.

Ukraine's national currency has lost two-thirds of its value in relation to the US dollar since early 2014. It was at about 8 Hryvnia to the dollar during 2013 and the first months of 2014, before declining rapidly to a low of 33 in late February 2015. On Tuesday, it was standing at 24.25 hryvnia to the dollar.

In defense of the currency, the government has imposed a requirement on corporations that they must convert 75 percent of all profits they make in foreign currencies into hryvnia. Gontareva hopes to quickly bring the exchange rate down to 20 to 22 Hryvnia through this mechanism.

Ukraine's economy is tanking

The uncertainty and expense caused by Kyiv's military conflict with ethnic Russian separatists in the country's southeast has caused major economic problems. Industrial production declined by one-fifth in January alone.

Poland's deputy prime minister, Janusz Piechocinski, leader of the government's centre-right junior coaltion party PSL, told Reuters news agency that Ukraine's economy was starting to disintegrate, creating a risk of hundreds of thousands of economic migrants fleeing into Poland.

Piechocinski said he thought Ukrainian elites had made disappointing progress toward building a Western-style democracy.

Piechocinski's remarks reflect growing friction between the PSL and the senior governing coalition party, Civic Platform (PO), which takes a firmly pro-Kyiv, anti-Moscow line. PSL presidential candidate Adam Jarubas has called for a more accommodating stance toward Russia over Ukraine.

Another bank failure in Ukraine

In yet another sign of the country's parlous economic state, Ukraine's central bank on Tuesday declared the country's fourth-largest lender, Delta Bank, insolvent, saying it had adopted risky policies. Delta's insolvency was due to "a failure to take timely, effective and sufficient measures to improve the finances of the bank," according to a central bank statement.

"Delta Bank decided to get into corporate lending but unfortunately it didn't have enough expertise in this sector," central bank chief Gontareva said in a briefing.

The central bank said 94 percent of Delta's depositors would be compensated for their lost deposits in full.

Ukraine's central bank closed down 30 banks last year, and has declared ten more banks bankrupt since the start of 2015.

nz/uhe (AFP, Reuters)

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