UPDATE 2-Ukraine's central bank holds key interest rate at 25%

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Central bank keeps key rate at 25%

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Western aid key to stability - central bank governor

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Interest rate for overnight certificates of deposit is cut

(Adds details, quotes, analyst comment)

By Olena Harmash

KYIV, March 16 (Reuters) - Ukraine's central bank said on Thursday it would keep its main interest rate steady at 25% as inflation remained high so far this year.

The bank has kept the interest rate at 25% since June 2022 as it sought to keep inflation under control following Russia's large-scale invasion, which has disrupted supply chains and battered the economy.

"The National Bank's board decided to keep the key policy rate at 25% and to introduce a number of additional measures to spur banks' competition for retail term deposits," Andriy Pyshnyi, the central bank's governor, told an online briefing.

"Such steps will help increase the attractiveness of hryvnia savings, support the stability of the forex market and create preconditions for restrictions to be eased."

Inflation remained high in the first two months of the year, with consumer prices growing by 24.9% percent in February year-on-year, government data showed.

The central bank said the relatively warm winter had helped increase the supply of food products and stabilise the fuel market, contributing to slower inflation. But it said risks remained high, including from the war and the possibility of Russian attacks causing more damage to critical infrastructure.

The bank said it expected inflation to slow to 18.7% on the 2023 results.

WESTERN AID - KEY FOR STABILITY

Pyshnyi said continued Western aid would be key for economic and financial stability.

He said Ukraine had already received about $6 billion in Western aid this year, and hoped talks with the International Monetary Fund on a new financing program would be finalised soon.

"We have managed to make considerable progress and we look with optimism on the next couple of days. We hope to finalise the work in the coming days this week, and believe in good news at the start of next week," he said from Warsaw, where Ukraine has been holding talks with IMF representatives.

Ukraine requires over $50 billion in foreign financing this year to cover the 2023 budget deficit and finance repairs of its energy sector and other critical infrastructure after months of Russian missile and drone attacks.

The government has already agreed financing from the European Union and the United States for this year, in addition to negotiating a multi-year lending program with the IMF which it hopes will help it secure funds from other donors.

The central bank said it would cut the interest rate on overnight certificates of deposit to 20% from 23%, and introduce three-month deposit certificates with a fixed rate of 25% from April 7.

Some analysts said the decisions indicated that the central bank was signalling a softer monetary policy.

"In practice, the benchmark for the value of money is and will remain the overnight rate, and it was significantly reduced," said Vitaliy Vavrishchuk, head of research at ICU investment house.

"The launch of the new three-month product does little to change the situation, as banks will be able to invest in it a very limited amount of free liquidity."

The central bank has repeatedly said it plans to keep its main rate at 25% at least until the end of the first quarter of 2024.

(Reporting by Olena Harmash, Editing by Timothy Heritage)