By Daryna Krasnolutska

(Bloomberg) -- Ukraine raised borrowing costs for a third
consecutive time, wrong-footing economists once again as it
struggles to convince them of its inflation-busting intentions.

The National Bank of Ukraine increased its key policy rate
to 16 percent, the highest since mid-2016, according to a
statement Thursday. None of the 13 economists surveyed by
Bloomberg predicted the move. One saw an increase to 15 percent,
one to 15.5 percent and 11 said the central bank would leave
rates on hold, even after inflation accelerated last month.

“Tighter monetary policy will help decrease inflation and
bring it back to the target range in the middle of 2019,” the
bank said in its statement.

While President Poroshenko promoted foreign investment in Ukraine in Davos, back home the central bank took on persistent inflation by raising interest rates. (UNIAN/Mikhail Palinchak)

Having begun transitioning to inflation targeting in 2016,
the bank has moved quickly to counter resurgent consumer-price
growth with higher rates, despite risks to an already-fading
economic expansion. Delays to Ukraine’s $17.5 billion bailout
haven’t helped, denting the hryvnia. Analysts failed to predict
the previous two interest-rate hikes, even as the bank expressed
concern about persistent inflation.

Consumer prices grew 13.7 percent from a year earlier in
December, while the central bank targets a range of 4 percent to 8 percent.
There are fears that higher government spending will boost
consumer prices in the run up to presidential and parliamentary
elections in 2019.

The bank also published new economic forecasts.
* 2018 inflation seen at 8.9% vs 7.3% previously
* Economic growth projected at 3.4%, up from 3.2%
* Foreign reserves to reach $20.5 billion vs $22.2 billion seen
earlier

Ukraine will probably get $2 billion from its International
Monetary Fund rescue program this year, according to the central
bank, which reiterated that the government should seek another
deal with the Washington-based lender once this one expires.

--With assistance from Andre Tartar.

To contact the reporter on this story:
Daryna Krasnolutska in Kiev at dkrasnolutsk@bloomberg.net

Timothy Ash writes: Due credit to the NBU and acting governor Smoliy. Raising rates was exactly the right thing to do, given trends in inflation and recent weakening of the UAH. And a brave personal move from Smoliy, given he faces Rada confirmation in two weeks. Shows he values NBU independence. This move greatly enhances his and NBU credibility.

Also: a pretty direct plea to the Poroshenko Administration to get the IMF program back on track, arguing that key for ensuring debt service is to keep on track.

NBU affirms its position as a bastion of reform in Ukraine.

Slider Photo: President Poroshenko speaks at the Ukraine House in Davos on Thursday morning. (UNIAN/Mikhail Palinchak)

Timothy Ash is senior sovereign strategist for emerging markets at BlueBay Asset Management in London and a member of the UBJ Editorial Board.

Posted Jan. 25, 2018