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Ukraine’s central bank raises interest rates to 25%, a first since the Russian invasion

Ukraine raised its main interest rate sharply to 25% from 10% on Thursday, tightening monetary policy for the first time since the Russian invasion to fight double-digit inflation and protect incomes and savings during the war.

The invasion has devastated Ukraine’s economy, which could shrink by at least a third this year, as the war has forced 40% of businesses to close, destroyed infrastructure, blocked shipping routes and reduced cities to rubble. The National Bank of Ukraine (NBU) had frozen the rate at 10% at the start of the invasion, but last week it signaled that it may start revising the rate as business activity has partially resumed in the safest parts of the country.

“The National Bank expects that raising the bank rate to 25% will be sufficient to ease the pressure on the foreign exchange market and stabilize inflation expectations, which in the long term will create the preconditions to the transition to a cycle of lowering the bank rate,” he said in a statement.

Inflation was already in double digits before the start of the conflict and rose further to around 17% in May from 16.4% in April, according to NBU estimates. The central bank said inflation could double in 2022 from 10% in 2021.

“The purpose of this decisive step, together with other measures, is to protect hryvnia income and savings, increase the attractiveness of hryvnia assets, reduce pressures on the foreign exchange market and to strengthen the National Bank’s ability to ensure exchange rate stability and curb inflation during the war,” the NBU statement said of the hike.

The number of small businesses that had suspended operations in April fell to 26% from 73% in March, according to a survey by the European Business Association, the union of businesses operating in Ukraine. (Reporting by Natalia Zinets; Writing by Matthias Williams; Editing by Kirsten Donovan)

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