bne IntelliNews -

The Ukrainian hryvnia fell 30% to a record low against the dollar on February 5 after the central bank let the currency float freely and raised its key interest rate in an effort to conserve its depleting foreign exchange reserves. 

With the currency hitting record lows everyday for the past few weeks and foreign reserves standing at $7.5bn - merely enough to cover five weeks of imports - the central bank has in effect abandoned attempts to prop up the currency. The currency has fallen from 8.7 hryvnia to the dollar a year ago to 24.63 at the lowest point on February 5.

The central bank raised its key interest rate to 19.5% as of February 6 from the current 14%, in a move aimed at curbing inflation and stablising financial markets. Valeriia Gontareva, the central bank's head, said that the bank is strengthening its monetary policy to target inflation and control "the market situation".  She added that the central bank has the tools required to ease market volatility and that she hoped the market would find a balance soon. "If there is any worsening of the situation the National Bank is ready with the tools needed to calm the foreign exchange market," Gontareva said.

However, analysts believe the rate increase would do little to dig Ukraine out of its financial mess, says Reuters. "They can't afford to lose more FX reserves but I don't think higher interest rates will scare people away from selling the UAH," said Simon Quijano Evans head of EM research at Commerzbank in London. "It's more about economic failings and the war situation at this stage. Interest rates won't make any difference just as they are not in Russia."

In 2014, consumer prices in Ukraine rocketed by 24.9%, while producer prices soared by 31.8%. Gontareva said that the high dependence of Ukraine's economy on imports is behind the high inflation rate in 2014, which resulted in price hikes amid a devaluation of the national currency.

In 2014, the NBU moved to flexible exchange rate formation, which resulted in the hryvnia practically halving in value against the dollar. In late 2014, the NBU shifted to a combination of market and administrative rate regulation, setting an indicative rate for the market through daily auctions in the interbank foreign exchange market using small quantities of its reserves. On February 2, the central bank announced the introduction of a single currency exchange rate, which  was eventually introduced on February 5.

The central bank now forecasts that GDP will contract by 4%-5% in 2015, while inflation will hit 17.2%. The inflation will slow down thanks to tighter monetary policy coupled with other stabilisation measures undertaken by the NBU and the government in the framework of a new co-operation programme with the International Monetary Fund (IMF).

During the press conference, Gontareva also announced that the NBU has reached an agreement with the IMF to increase financial aid to the country, without providing exact figures. Earlier, the IMF authorities also admitted that the Fund has been is in talks with Ukrainian authorities about increasing its financial support and said it would support a larger, longer-term funding plan than its current $17bn programme.