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Ukraine's central bank trims key rate to 13% in third consecutive cut

By Olena Harmash

KYIV (Reuters) -Ukraine's central bank lowered its main interest rate to 13% on Thursday, its third rate cut this year, as policymakers seek to boost lending and support a large-scale campaign to restore the energy sector.

Governor Andriy Pyshnyi said the central bank cut rates by 50 basis points as inflation has been lower than expected so far this year. The central bank expects inflation to pick up in the coming months but to remain moderate.

"The central bank consistently pursues a policy that should support Ukraine's economic recovery," Pyshnyi told an online media briefing. "Over the past year, we have significantly lowered the rate from 25% to 13%."

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Following Russia's large-scale invasion in February 2022, the central bank hiked the key rate to 25% and imposed strict capital controls and other restrictions to maintain macroeconomic and financial stability. Ukraine's economy shrank by about one third in the first year of the war.

The central bank started to cut the rate in June 2023 as Ukrainian businesses adjusted to war-time realities, the economy posted modest growth and inflation slowed.

The latest cut was in line with policies aimed at supporting borrowing needed for Ukraine's wartime recovery and maintaining the appeal of holding savings in the local hryvnia currency.

REBUILDING ENERGY SECTOR

Pyshnyi said the central bank expected commercial banks' credit rates to fall and lending to increase.

"We see that banks are capitalized and profitable today," he said. "Today, the Ukrainian economy needs proper resources to implement probably the largest restoration of energy-generating capacities in our history."

Ukraine's energy sector was already damaged in the first winter of the war in 2022-2023 but Russia has intensified its bombardments since March, knocking out about half of the generating capacities and causing blackouts across the country.

Energy Minister German Galushchenko told Reuters that Ukraine needs more air defences within weeks to allow energy repairs or it will not be able to meet demand in the winter.

The government nearly doubled consumer electricity tariffs this month and the central bank said it would be one of the factors contributing to rising inflation going forward.

In the first five months of the year, consumer inflation was below forecasts, reaching 3.3% year-on-year in May.

The central bank has forecast inflation will rise to 8.2% by end-2024 and 6% by the end of next year.

A key pillar of Ukraine's macroeconomic stability during the war was billions of dollars in Western financial aid.

The central bank is expecting about $4 billion in financial support from the International Monetary Fund and the European Union in the coming weeks.

The central bank reiterated that a total of $38 billion in economic aid from Kyiv's Western allies was expected this year. Next year the central bank expected $25 billion in foreign financing, said Serhiy Nikolaichuk, a deputy governor.

The central bank last cut its key rate to 13.5% from 14.5% in April.

(Reporting by Olena Harmash; editing by Christina Fincher)