Ukraine sets its key interest rate at 25pc

UKRAINE’S central bank more than doubled its benchmark interest rate from 10pc to 25pc in its first increase since Russia launched its invasion of the country in late February.

Policymakers raised borrowing costs to their highest level since September 2015 yesterday, making Ukraine’s interest rate the highest in Europe.

Ukraine’s economy could shrink by a third this year, the World Bank has estimated, as workers were forced to flee their homes and households brace for potential food shortages owing to ports being blocked or destroyed.

Factories have been bombed and Kyiv is reportedly considering shutting down the nation’s largest nuclear power plant as it comes close to being seized by Russian forces.

Kyrylo Shevchenko, Ukraine’s central bank governor, said: “The inflation development requires the National Bank to return to active interest-rate policy to prevent further deterioration of inflation expectations and dollarization of economy.”

Policymakers signalled that 25pc was the peak and that as inflation began to abate, the bank will move toward cuts.

Serhiy Nikolaychuk, a deputy governor, said: “We expect that our next move will be toward a decrease, but it will only happen when we feel that devaluation and inflation expectations have calmed down.”

The economy is improving in safer parts of the country away from fighting, but inflation was running at about 17pc in May, the central bank has said, adding that it could reach 20pc this year.

The National Bank of Ukraine (NBU) has fixed the price of hryvnia, but at the cost of selling billions of pounds worth of its reserve currencies.

“The NBU expects that a significant rise in the key policy rate, to 25pc, will be sufficient to ease pressures on the FX market and stabilise inflation expectations,” it said.