Russia’s central bank unexpectedly raised its key interest rate for the first time since 2014 on Friday, citing significant increase in inflation risks due to highly uncertain external conditions.
The Board of Directors decided to raise the key rate by 0.25 percentage points to 7.50 percent, the Bank of Russia said in a statement. Economists had expected the bank to hold the rate steady.
The bank also decided to suspend foreign currency purchases in the domestic market through the end of the year. This move is expected to help to curtail the exchange rate volatility and its influence on inflation, over the next few quarters.
Following the announcement, Bank of Russia Governor Elvira Nabiullina said risks referred to those of mounting inflation and inflation expectations in response to exchange rate volatility as well as the forthcoming VAT rise.
“Moving forward, we will look into how feasible a further increase in the key rate will be, taking into account inflation movements and economic performance against the forecast, as well as external environment-side risks and financial markets’ response,” she said.
The central bank forecast annual inflation to be 3.8-4.2 percent this year, 5-5.5 percent in 2019 and return to 4 percent in 2020.
Growth forecast for this year was left unchanged at 1.5-2 percent. The projections for next year was updated to 1.2-1.7 percent, considering the upcoming VAT increase and a boost in government spending. The forecast for 2020 was raised to 1.8-2.3 percent.
“Economic growth might accelerate over the next few years provided that structural changes are successfully implemented,” Nabiullina said.
“Economic growth pick-up will come without greater inflationary pressure,” she added.
“Together with the ban on FX purchases, this [the rate hike] will add stability to the local FX market,” ING Bank analyst Egor Fedorov said.
The analyst expects more aggressive sanctions against Russia to be debated in the US Congress into and after mid-term elections.
“Given a backdrop of rising US rates and unresolved trade issues, we maintain a view that USD/RUB will be trading back above 70 over coming weeks and months,” Fedorov added.