KYIV Ukraine's central bank lowered its key interest rate to 16% from 20% on Thursday, its the third consecutive cut this year as the war-torn economy shows signs of growth and inflation continues to slow.

Analysts had expected the rate to be lowered as inflation has been declining faster than expected this year. The central bank said it had improved its forecast for annual inflation this year to 5.8% from an earlier forecast of 10.6%.

In a statement, it said it saw room to potentially lower the rate again later this year, but that it only saw limited scope for cuts in 2024. Gross domestic product is on track to grow 4.9% this year, up from a previous forecast of 2.9%, it said.

"The board of the national bank of Ukraine decided to set the discount rate at the level of 16% ... In this way, the national bank modernises its operational design of monetary policy," the central bank said.

Russia's February 2022 invasion forced the central bank to hike its key rate to 25% and tighten monetary requirements to mitigate the damage to the economy as millions fled the country, logistics and exports were disrupted, key energy infrastructure were damaged and whole cities were occupied.

The economy shrank by about a third last year.

But Ukrainian businesses have adapted to the myriad war-time challenges and the economy has started recovering. Government data showed that GDP grew 5.3% in the first nine months of 2023.

(Reporting by Olena Harmash; Editing by Tom Balmforth)