Ukraine's currency in free fall after central bank rate hike

The Ukrainian hryvnia is down over 40%, hitting record lows against the dollar, after a rate hike by the central bank failed to calm nerves over the currency.

Ukraine’s central bank increased its key rate to 19.5% from 14% and scrapped foreign-currency auctions on Thursday in a move that was intended to move the country’s currency closer to a free-float. However, it sent the hryvnia tumbling.

Central bank governor Valeriia Gontareva stressed that the decision not to intervene in currency markets at this time did not constitute a free-float — though, she added, people would have to “get used to market volatility.”

USDUAHBloombergThe dollar versus the hryvnia.

The International Monetary Fund is due to finalise a decision on increasing financial aid to Kiev by February 7. It comes as Ukraine faces an acute cash shortage with ongoing fighting against pro-Russian rebels in the east of the country weigh heavily on the economy.

The central bank estimates that the economy shrunk by 6.7% last year and is expected to contract by 4%-5% in 2015. However, it has become more concerned of late by runaway inflation which was 24.9% in December and is expected to remain above 17% through this year prompting the rate hike.

Ukraine is set to hand over $US19 billion over the next three years ($US7.5 billion in 2015, $US4.7 billion in 2016, and $US6.6 billion in 2017) in debt payments that its ailing economy can ill afford. Of that, the most pressing concern is a $US3 billion loan from Russia that is now the subject of increasing interest from the Kremlin as it seeks to address its own economic problems.

Ukraine LoanBank of America Merrill LynchUkraine debt repayment schedule.

Earlier this week Russian president Vladmir Putin
said that Ukraine should repay the loan because Russia needs the money to fight the economic crisis that’s currently ravaging the nation, reports Bloomberg’s Anton Doroshev.

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