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Monday, May 19, 2008

ERDB Report and the Hryvnia Band

The European Bank for Reconstruction and Development this weekend cut its growth forecasts for Ukraine, Kazakhstan, and Romania. More than the cut itself, what was perhaps more important were the reasons given. The EBRD warned that Kazakhstan was suffering from 'the impact of inflation and credit stagnation' and reduced expected gross domestic product growth from 8.5 to 5.1 per cent. In Romania's case the growth forecast was cut from 6.5 to 5 per cent, on the grounds of 'rapid monetary tightening', with the central bank raising interest rates to counter inflation.For Ukraine, the growth forecast was reduced from 6 to 5.5 per cent, as the EBRD warned of the impact of inflation which last month hit an annual rate of 30 per cent, the highest in Europe and indeed among the highest globally at this point.

In a move which is possibly related to the ERDB report Ukraine central bank Deputy Governor Oleksandr Savchenko said this morning - at the meeting organised by the ERDB in Kiev - the central bank may have to change its policies to cut the inflation rate to its current target of between 18 percent and 19 percent this year (after it soared to 30.2 percent in April). This is being widely interpreted as meaning that the Ukrainian central bank may allow the hryvnia to trade more freely against the dollar - possibly as soon as this week - in an attempt to cap inflation after it accelerated to the fastest pace in more than a decade last month. The central bank has been effectively controlling the national currency since 1998.

The hryvnia has so far gained 5.1 percent this year in interbank trading amid speculation the Natsionalnyi Bank Ukrayyny has abandoned its practice of buying and selling the currency to keep it steady against the dollar.


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