The International Monetary Fund on Thursday urged Ukraine to keep monetary policy tight and to adopt a more flexible exchange rate in the face of record inflation and uncertainties over growth prospects, according to Reuters.

"IMF directors expressed concern that some macroeconomic vulnerabilities have increased," the fund said in its annual review of Ukraine`s economy.

"Significantly higher inflation and a wide external current account deficit reflect volatility in world commodity prices, but mainly strong domestic demand growth," the fund said.

It cautioned that domestic lending growth, including in foreign exchange to unhedged borrowers, and high house prices have increased credit risks, and welcomed the authorities` attention.

Inflation has crept higher and higher in Ukraine since last year amid rapid domestic demand growth, and soaring global food and fuel prices. Month-on-month inflation hit 3.1 percent in April and year-on-year levels exceeded 30 percent.

Meanwhile, the IMF said the effects on Ukraine from global financial turbulence, which sprang from the U.S. subprime mortgage crisis, have started receding.

The credit turmoil prompted external spreads to rise sharply in mid-2007 and euro bond issues to dry up. But since March 2008, the IMF said eurobond spreads were declining and banks and corporates had access to longer-term external financing, which have facilitated rollover of debt maturities.

Still, with uncertainties around growth prospects in Ukraine and other emerging economies due to market turbulence and economic slowing in the United States and Europe, the IMF said further tightening of policies will be needed to keep the economy stable.

The IMF said Ukraine authorities should aim for a near-balanced, or tighter, budget in 2008.

"IMF directors considered that, should growth slow significantly and inflationary pressures ease, a larger fiscal deficit could be accommodated if financing is available," the fund said.