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HomeEconomyRussia's central bank unexpectedly raises interest rate to 8.5%, more than expected

Russia's central bank unexpectedly raises interest rate to 8.5%, more than expected

By Elena Fabrichnaya, Alexander Marrow and Vladimir Soldatkin

MOSCOW (Reuters) – Russia’s central bank raised its key interest rate to 8.5% by a larger-than-expected increase on Friday , sending borrowing costs higher as a weak ruble added to inflationary pressures from a tight labor market and strong consumer demand.

It was the bank’s first rate hike in more than a year and gradually reversed an emergency hike to % last February after Russia sent armed forces to Ukraine, prompting Western sanctions on Moscow. The last rate cut to 7.5% was in September.

“Over the medium term, the risk of fueling inflation has increased significantly,” the bank said in a statement. “Growth in domestic demand has outpaced the ability to expand production, including due to limited labor resources.”

This has fueled persistent inflationary pressures, while the ruble’s depreciation this year “significantly magnifies the risk of fueling inflation,” it said.

The central bank raised its year-end inflation forecast from 4.5-6.5% to 5.0-6.5%, currently slightly below 4%, and indicated that there is a possibility of further interest rate hikes at future meetings.

A surprise decision

The decision surprised analysts polled by Reuters, who had forecast a 86 basis point hike.

However, some analysts have revised their forecasts in recent days, expecting a bigger rise, as weekly consumer prices in Russia accelerated after this week’s inflation data showed households’ inflation expectations for July rose.

“The 86 basis point rate hike far exceeded expectations … “reflecting policymakers’ concerns about inflation risks,” said William Jackson, chief emerging markets economist at Capital Economics. ”

“While we don’t think monetary tightening will continue to be as aggressive at subsequent meetings, we now expect at least 86 basis points of rate hikes before the end of the year.” “

Annual inflation has fallen below the central bank’s 4% target in recent months due to a high base effect in which inflation soared last year to its highest level in years.

Inflation is currently at 3.20% and is on the rise again, the Economy Ministry said this week.

Governor Elvira Nabiullina said “increased inflationary pressures are largely demand-driven,” pointing to the domestic tourism market and Car production is an industry where supply cannot keep up with demand.

Nabiullina says this demand pushes up imports, causing the ruble to weaken as exports fall.

Natalia Orlova, chief economist at Alfa Bank, said the rate hike looks like a reaction to money market conditions, given that other inflationary pressures mentioned above were already evident at the June 9 central bank meeting.

Nabiullina says the ruble has depreciated sharply, but there is excess demand Exacerbating the situation. Labor shortages and supply constraints are key factors.

Pressure on the ruble has increased since a failed armed uprising by Wagner’s mercenaries in late June. Risk appetite has also been dampened by Moscow blaming Ukraine for attacks on Russian infrastructure.

Central Bank Governor Elvira Nabiullina to further elaborate on central bank forecasts at GMT1200 media briefing and policy.

Next rate-setting meeting scheduled for September .



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