Ukraine Currency Spikes as Central Bank Raises Rates

The hryvnia has depreciated by over 31% in 2014. This dramatic drop has wreaked havoc on the economy as the country continues to endure widespread violence and uncertainty. In an effort to stabilize the rapidly depreciating currency, the central bank decided to raise interest rates. This move has already resulted in a slowing of the unprecedented selloff of the currency on the global markets.  The foreign exchange markets have been flooded with hryvnias of late as investors, traders and laypeople are dumping the Ukraine currency en masse in favour of the EUR, USD and GBP. Since the interest rates were raised, the currency managed to claw back some 6.7% of its value – but there’s a long ways to go yet. The announcement made by the central bank now pegs the interest rate at 9.5% - up from 6.5% this month. With interest rates rising, demand for government bonds plummeted – as is standard with the bonds/interest rates inverse relationship.

Massive Interest Rate Spikes

The interest rates were raised in a desperate attempt to stop the economy from haemorrhaging. This monetary policy decision marks the biggest spike in interest rates since the Russian debt default back in 1998. The policy action is intended to stop the selloffs of the hryvnia and to attract foreign investors to invest in the Ukraine. The rate for refinancing loans has been increased by 7% to 14.5%, while CDs now enjoy 3% extra at 4.5%. Another reason for raising the interest rates is to prevent inflationary pressures on the country as a result of the poor buying power of the currency. The temporary solace enjoyed by the rate hike will please bankers in Kiev, but it is unlikely to have a lasting effect as the tensions in the east of the country are reaching fever-pitch levels. Of equal concern to the Ukraine is that their foreign currency reserves have plummeted from $31.7 billion (April of 2012) to a paltry $15.1 billion (present value). Further assistance for the reeling hryvnia has been stopped dead in its tracks. 

Putin Plays Chess with the West with Ukraine as his Pawn

The International Monetary Fund (IMF) has offered the Ukraine $18 billion in loans through 2016. This also opens up the country to receive up to $27 billion from international financiers. Ukrainian military convoys have been blocking all approaches to Slovyansk. The Russians for their part feel emboldened because the Ukrainian economy is teetering on the brink of collapse. The country operates a massive underworld economy which does not comply with IMF loan guarantee measures. The Russians are keen to rule the Ukraine as it was once part and parcel of the USSR. Since Russia is prospering with oil and gas resources, it is eager to reassert itself on a global scale. Putin has succeeded in brainwashing the Russian populace into thinking that Ukraine is repressing ethnic Russians – this in an effort to obfuscate the economic conditions in Russia, where capital flight and a collapsing stock market are taking place.