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Ukraine raises key interest rate by 5.5 percentage points after national currency slides

KIEV, Ukraine – Following a massive drop in its currency that has stoked concerns of runaway inflation, Ukraine on Thursday raised a key interest rate by a whopping 5.5 percentage points.

The rate hike to 19.5 per cent was a response to the 46 per cent slide in the hryvnia against the U.S. dollar earlier on Thursday. A plunging currency can fan inflation by making imports more expensive.

The move appears to have eased the pressure on the currency somewhat and it was trading 18 per cent lower at 18 hryvnias per dollar in early evening trading. The hryvnia has faced intense selling pressure for over a year, largely because of the ongoing fighting in eastern Ukraine where, according to President Petro Poroshenko, Kyiv spends up to 7 million euros ($8 million) a day fighting Russia-backed separatists.

Unlike the Russian ruble, another much-battered currency, the hryvnia does not float freely, creating a discrepancy between the official exchange rate, the rate on high street and on the black market. Alongside the rate hike, the central bank gave more room for the hryvnia’s exchange rate such and scrapped daily foreign currency auctions.

“The National Bank is going to implement stricter monetary and credit policies in order to provide a stable and controllable development of the market situation,” the bank said in a statement, saying that the bank was forced to act in the view of the galloping inflation which was higher nearly 25 per cent year on year in December.

Ukraine has received $4.6 billion from the International Monetary Fund as part of a $17 billion aid package but it is seeking more funding as the ongoing conflict in the east shows no signs of ending. The country’s foreign currency reserves are just $6.4 billion while its GDP is due to decline by 5 per cent this year after an estimated 6.7 per cent drop last year.

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Nataliya Vasilyeva in Moscow contributed to this report.