By Olena Harmash
KYIV (Reuters) -Ukraine's central bank cut its key interest rate on Thursday to 20% to support economic recovery after nearly 19 months of war with Russia, and signalled further reductions were possible.
It was the second consecutive cut in the key rate by the National Bank of Ukraine (NBU), which had lowered the rate to 22% from 25% on July 27 in the first reduction since Russia's full-scale invasion in February 2022.
"The further pullback in inflation and the NBU's ability to ensure FX market sustainability are making it possible to continue the cycle of key policy rate cuts while maintaining the sufficient attractiveness of hryvnia savings," the central bank said in a statement, referring to the local currency.
"Such a step will support the economic recovery without posing threats to macroeconomic and financial stability," it said.
The central bank said it planned to continue its key policy rate-cutting cycle, but that it would act cautiously given the uncertainty and risks related to the war.
The bank also lowered rates for deposit certificates and on refinancing loans by two percentage points to 16% and 22%, respectively.
The cut had been expected by bankers and analysts as inflation has been slowing faster than anticipated so far this year. In August, consumer price inflation slowed to 8.6% year-on-year.
The central bank said consumer inflation had been falling more than anticipated mainly thanks to higher food supply and a good harvest had contributed to lower prices for cereals, flour, vegetables, and some fruits.
Still, core inflation of 10% in August was close to forecast, the bank said.
"The overall downward trend in inflation will continue, but the potential for a rapid decline is almost exhausted," it said.
WAR IS KEY RISK
Better harvests will continue to limit price growth in the coming months, the bank said, but the pressure on businesses' costs will remain significant, both due to war-related losses and rising electricity and fuel prices.
"The key risk to inflation dynamics and economic development is the protracted duration and unpredictable nature and intensity of the full-scale war," the NBU said.
It said budget needs remained high because of the war and further international support was critical.
Ukraine depends heavily on Western aid to finance budget spending. Kyiv expects to receive $42 billion in aid this year, and next year will need at least $37 billion to cover its budget deficit, the central bank has said.
In a move to spur competition between banks for depositors, the central bank has also halved to 35% the share of existing retail term deposit balances that are used to calculate the limits on the banks' purchases of three-month certificates of deposit.
"This will further encourage the banks to compete for depositors, and to expand their term deposit portfolios," the central bank said, adding the changes would come into effect on Sept. 18.
(Additonal reporting by Anna Pruchnicka, Editing by Tom Balmforth, Timothy Heritage and Mark Potter)