* Plans softer monetary policy to try to spur growth
* May cut main interest rate from current 6.5 percent
* May release frozen commercial funds this year
By Natalia Zinets
KIEV, Jan 28 (Reuters) - A bailout package from Russia has protected Ukraine's economy so far from unrest in the capital Kiev but monetary policy needs to be softened to try to kickstart growth after five quarters of recession, a top central bank official said.
President Viktor Yanukovich's decision to spurn an EU free trade agreement in favour of closer ties with Russia in November sparked protests which have since turned into a mass anti-government demonstration punctuated by violence.
But the violence, and resulting political twists and turns in Yanukovich's government, have yet to be felt by the economy, Olena Shcherbakova, head of the bank's monetary policy department told Reuters in an interview.
She said a December agreement with Moscow which ended trade barriers against Ukrainian goods, cut the price of Russian gas and provided a $15 billion bailout by buying Ukrainian Eurobonds had cushioned the economy from any immediate fallout.
"There were uncertainties on the market last year but they declined once the agreement had been reached," she said.
She said the central bank planned to take further steps to boost bank lending and try to increase investment to spur economic recovery before a presidential election next year.
"Our main goal for this year is creating conditions for boosting bank lending to the economy and for the implementation of investment projects that should bring results," she said.
She said a decrease in the main interest rate - the discount rate - was one of the measures being considered.
The government has targeted 3 percent growth in 2014, but the State Statistic Service has not yet published gross domestic product (GDP) data from last year.
Analysts at 16 Ukrainian banks and brokerages, polled by Reuters in December, expected GDP to shrink by 0.5 percent in 2013 after it grew 0.2 percent in 2012.
"We will do everything required on our side. We will provide a proper money supply," said Shcherbakova.
Last year, the central bank provided banks with refinancing of 71.5 billion hryvnias (about $9 billion). Bank lending grew by 96.6 billion hryvnias, or 12 percent, last year.
The former Soviet republic's economy, dominated by steel and grain exports, slipped into recession in the second half of 2012 due to a sharp decline in global demand for steel and because of Russian trade barriers against Ukrainian grain.
Shcherbakova said the bank was going to employ stimulus measures, one of which would be a gradual release of banks' funds from the central bank.
In 2008-2009 the regulator ordered banks to transfer 100 percent of their mandatory reserves into a central bank account in order to withdraw billions of hryvnia from the local market and restrain pressure on the exchange rate.
In 2011-2013 the central bank decreased the requirement to 40 percent. At the end of 2013 approximately 11 billion hryvnias remained frozen in the central bank account.
"We will bring this requirement down to zero percent. If possible, within the year. We will strive to do it," Shcherbakova said. "We will continue to move in this direction in order to return banks all their funds."
A decrease of the main interest rate - the discount rate - is also possible this year, she said.
Ukraine posted 2013 inflation at 0.5 percent after deflation at 0.2 percent in 2012. The government targets to keep inflation at 4.3 percent in the coming year.
"We have all conditions and reasons to cut the rate further," Shcherbakova said, but she did not give a level.
Last year the regulator cut the rate twice by 50 basis points - to 7.0 percent on June 6 and to 6.5 percent on Aug. 13.
"It was our signal that the central bank sees a possibility of declining bank lending costs for the economy," she said.
Shcherbakova also said she expected a decline of bank rates for corporate lending to 12-13 percent from the current level of 16.6 percent. (Reporting and Writing by Natalia Zinets, Editing by Jack Stubbs and Elizabeth Piper)
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