July 12, 2018 / 11:53 AM / 9 months ago

UPDATE 2-Ukraine central bank raises key rate to 17.5 pct over inflation risk

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By Natalia Zinets

KIEV, July 12 (Reuters) - The Ukrainian central bank (NBU) unexpectedly raised its main interest rate by half a percentage point on Thursday, warning that delays with a $17.5 billion IMF loan programme posed a risk to economic stability.

Ukraine has received no International Monetary Fund money since April 2017 due to slow progress implementing reforms including gas tariff increases and the creation of an anti-corruption court.

Parliament may vote later on Thursday on amendments to legislation on the anti-corruption court because the IMF is not satisfied with the current version of the bill.

The central bank said it still expected Ukraine to receive $2 billion from the Fund this year, but lowered its end-year foreign reserves forecast to $20.7 billion from $21.6 billion.

Reform delays “reduce the likelihood that Ukraine will receive financing from the IMF, and narrow further the country’s opportunities to secure financing on the international capital markets required for making public debt repayments, which will peak in 2018-2020,” it said in a statement.

Inflation slowed to 9.9 percent in June from 11.7 percent a month earlier, but the central bank said the IMF loan delays, a pick-up in domestic demand and labour migration threatened its longer-term inflation targets.

“A tighter monetary policy will neutralise their effect, driving inflation down to 5.8 percent as of the end of 2019 and 5 percent in 2020,” it said, explaining its decision to raise rates to 17.5 percent from 17 percent.

A Reuters poll of analysts had forecast that the bank would keep rates on hold.

The central bank expects the authorities to raise gas prices and other communal tariffs by 25 percent before the end of 2018, adding an additional 0.9 percentage points to the inflation rate, deputy central bank governor Dmytro Sologub said in a briefing after the rate change was announced.

The regulator maintained its economic growth forecast for 2018 at 3.4 percent, and forecast growth of 2.5 percent in 2019 and 2.9 percent in 2020.

“A key assumption of the above scenario is based on Ukraine continuing to carry out structural reforms, as provisioned in the IMF-supported programme,” it said.

The central bank sees IMF loans as a vital boost to reserves as Ukraine faces $2.3 billion in foreign currency debt payments in August to October.

It forecast Ukraine raising $1.5 billion with new Eurobond placement this year - lower than its previous estimate of $2.5 billion.

Writing by Alesandra Prentice; editing by Matthias Williams, Gareth Jones and Alexandra Hudson

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