Ukraine's central bank raised its benchmark discount rate by 300 basis points to 9.5 percent to increase the attractiveness of the hryvnia currency and curb inflationary pressures amid a deterioration of economic confidence due to growing unrest in eastern Ukraine.
The National Bank of Ukraine (NBU), which cut its discount rate by 100 basis points in 2013, also said it would double the overnight loan rate to 14.5 percent from 7.5 percent to help ease tensions in the money market and support liquidity.
"In order to curb inflation and balance the situation in the money market, the NBU board deems it necessary to take steps towards increasing the intrinsic value of the national currency through the use of interest rate policy levers," the central bank said.
Ukraine's headline inflation rate jumped to 3.4 percent in March from 1.2 percent in February. The central bank targets consumer price inflation of 4-6 percent this year and 3-5 percent in 2015.
On Friday the hryvnia currency was down 32 percent against the euro since the start of the year and today it fell to 17.97 to the euro, down 8.1 percent on the day for a decline this year of 37 percent.
The central bank said there were risks of higher inflation due to the lower exchange rate and the government's plans for economic reform, and it would take other measures to increase the attractiveness of bank deposits.
Elena Shcherbakov, director general of the central bank's monetary policy department, was quoted as saying that "Ukraine has a rich experience of unusual situations in the money money market," and the best course of action is to provide maximum liquidity support to banks so they can meet their obligations and increase the value of the currency to limit the speculative demand and help restore banks' deposit base and thus ensure normal operation of the banking system and help maintain price stability.
Ukraine's banks have seen a steady stream of withdrawals since early February when political unrest first erupted in Kiev. The central bank has also seen its reserves drop as it has been intervening in foreign exchange markets to defend the currency's decline.
On February 7 the central bank introduced limits on foreign currency transactions but this only halted the decline in hryvnia temporarily.