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Ukraine's central bank lowers key rate to 13.5% in second consecutive cut

By Olena Harmash

KYIV (Reuters) -Ukraine's central bank lowered its main interest rate to 13.5% on Thursday in its second consecutive cut of the year, but said Russian airstrikes on the energy system would dampen wartime economic growth.

The bank said it saw room for a further easing of the interest rate after long-delayed U.S. aid was approved on Wednesday, with inflation lower than initially forecast this year.

But it cut its 2024 gross domestic product forecast to 3% from an earlier estimate of 3.6%.

"The economic recovery will continue, but will be restrained – primarily, due to significant damage to energy infrastructure," the bank said in a statement.

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Russia has heavily bombed the Ukrainian energy sector in recent weeks, targeting power stations and substations and forcing authorities to introduce rolling blackouts in several regions.

"The course of the full-scale war continues to be the key risk to inflation dynamics and economic development," the bank said.

It said that real GDP growth in the first quarter had been weaker than expected, mainly because of limited budget spending amid uncertainty over foreign financial aid. It provided no figures.

The economy ministry had earlier estimated that GDP grew by 3.6% in the first two months of 2024 after rising 5.3% in 2023 and plunging 28.8% in 2022, the year Russian began its full-scale invasion.

THE 'OXYGEN' BUSINESS NEEDS

Ukraine has managed to maintain economic and financial stability during 26 months of heavy fighting with the help of billions of dollars in financial aid from its Western partners.

The central bank said Ukraine could expect about $38 billion in Western financial aid this year.

Central bank officials said Kyiv received nearly $9 billion from its partners in March and a new 1.5-billion-euro ($1.6 billion) tranche from the European Union this week.

Supported by an inflow of foreign aid, high reserve levels and a controlled situation on the foreign exchange market, the bank was now preparing steps to ease some currency and capital controls in coming weeks, Governor Andriy Pyshnyi said.

The steps would include some easing of restrictions on new dividends, reviewing bans on services imports and changes in limits on servicing old debts.

"This is the oxygen that Ukrainian business is waiting for," Pyshnyi told a media briefing. "The Ukrainian economy requires an inflow of private capital."

In the early days of Russia's invasion in February 2022, the central bank imposed restrictions on the movement of capital and introduced curbs on the foreign exchange market.

As the economy has adjusted to wartime realities, the central bank has started easing the restrictions.

Pyshnyi said inflation had been slowing faster than initially expected this year. The central bank improved its inflation forecast to 8.2% for 2024 from an earlier target of 8.6%. Annual inflation stood at 3.2% in March.

Thursday's monetary policy meeting was the second in a row to cut the main interest rate. The rate was cut to 14.5% in March.

(Reporting by Olena Harmash; editing by Tom Balmforth and Timothy Heritage)