The new governor of the NBU Yakiv Smolii was only nominated for the job a week ago but took the tough decision to hike the monetary policy rate by 150bp to 16% on January 25.

The increase follows on from another surprise increase of 100bp in December to 14.5% as the regulator battles against inflationary pressures when Smolii was still acting governor.

President Petro Poroshenko officially nominated Smolii for the job of governor on January 18 in a move that has been welcomed by western investors. It was an especially brave move as Smolii still has to face a Rada meeting to confirm him in his new position in the coming weeks and hiking rates is never popular with politicians.

Inflation has been driven higher than the NBU was hoping for in 2017 by the government decision to double the minimum wage at the start of last year and more recently by the rise in food prices. The regulator was targeting inflation of 12.2% for 2017.

January got off to a bad start after the statistics authorities reported that Ukraine’s consumer price inflation (CPI) ticked up in 2017 to 13.7% as compared with 12.4% in 2016. The NBU target for this year is to bring inflation into a 4%-8% range.

The hike caught economists out, who were expecting a smaller increase. None of the 13 economists surveyed by Bloomberg predicted the move. One saw an increase to 15%, one to 15.5% and 11 said the central bank would leave rates on hold, even after inflation accelerated last month, Bloomberg reports.  Analysts failed to predict the previous two interest-rate hikes, even though the NBU is clearly focused on its fight to bring inflation under control.

“Tighter monetary policy will help decrease inflation and bring it back to the target range in the middle of 2019,” the bank said in its statement.

The increased cost of borrowing will weigh on the economy as growth faltered last year.

Tim Ash, head of strategy at Bluebay Asset Management praised the tough action. “Due credit to the NBU and acting governor Smolii - raising rates was exactly the right thing to do given trends in inflation and recent weakening of the UAH. And a brave personal move from Smolii given he has to face Rada confirmation the week after next. Shows he values NBU independence. This move no end enhances both his and the NBU credibility.”

The NBU also released a new set of macroeconomic forecasts as part of the rate hike decision notes: 2018 inflation is seen at 8.9% vs 7.3% previously; economic growth is projected at 3.4%, up from 3.2%; and foreign reserves are to reach $20.5bn vs $22.2bn seen earlier, the NBU said as reported by Bloomberg.

Of interest in the release is the fact that the estimate for the gross international reserves (GIR) is down by $2bn from the earlier estimate, which suggests that the NBU doesn't believe the IMF will pay out any more money from its $17.5bn stand by programme this year.