KIEV, Nov. 8 – The National Bank of Ukraine said on Thursday it will hike interest rates it charges commercial banks for refinancing loans in response to rocketing consumer inflation reported in October.

Ukraine’s consumer prices rose 2.9% on the month in October, up from 2.2% in September, pushing cumulative inflation to a staggering 11.7% in January through October, according to the State Statistics Committee.

The figure is the highest 10-month consumer price growth over the past seven years and is a major blow for the government, which had originally seen inflation at 7.5% in 2007.

Many economists thought inflation would increase to between 11% and 14% this year, but the latest statistics suggest that 2007 inflation may be actually worse.

Viktor Pynzenyk, a former finance minister, said inflation may reach between 15% and 16% in 2007, while 12-month inflation had already hit 14.8% if measured between October and October 2006.

“This is twice as much as what the government had planned for 2007,” Pynzenyk said.

The rampant inflation figures released underscore the failure by the government of Prime Minister Viktor Yanukovych to curb consumer price increases despite its administrative anti-inflation measures launched last month.

The figures show the extent of macroeconomic challenge and explain a recent high profile anti-inflation meeting, involving President Viktor Yushchenko, the NBU, Cabinet of Ministers and local government officials.

Yushchenko, himself a former head of the central bank, urged the NBU and the government to launch a concerted effort as soon as this month to prevent further increase of inflation.

Anatoliy Shapovalov, first deputy governor at the NBU, said Thursday the central bank reacted by increasing interest rates it charges commercial banks for refinancing loans. He did not specify the new rates, but said that rates will now be exceeding the level of inflation.

Since May, the NBU has been charging 9% annual interest for overnight refinancing loans to banks that used Treasury bills as collateral, and 10% for loans with no collateral.

The NBU indicated that for now it will keep the discount rate, its key lending rate, unchanged at 8%, but the central bank’s reaction to the growing inflation underscores a high level of concern.

This leaves the door open for the central bank to hike the discount rate later this year if anti-inflation measures fail to produce significant improvement, analysts said.

Ukraine’s growing inflation this year was mostly fueled by growing price of food and energy, but also due to increasing domestic demand triggered by increasing social payments and expanding consumer lending.

Consumer price hikes were also fueled by growing money supply in Ukraine as the NBU had been purchasing – for hryvnias - excessive hard currency on foreign exchange markets.

Broad money supply rose 35.9% in January through October to 354.8 billion hryvnias, while narrow money supply rose 34% to 130.2 billion hryvnias in the period, the NBU reported.

The amount of cash circulating outside of the banking sector rose 32% to 99 billion hryvnias, the NBU said. (nr/ez)