Russia raises key rate to 5.5%, flags more hikes to curb inflation

Russia raises key rate to 5.5%, flags more hikes to curb inflation

© Reuters. FILE PHOTO: A woman sells fruit and vegetables in a street in the far northern city of Vorkuta, Russia September 16, 2018. Picture taken September 16, 2018. REUTERS/Eduard Korniyenko

By Andrey Ostroukh

MOSCOW (Reuters) -Russia’s central bank raised its key interest rate by 50 basis points to 5.5% on Friday and said more hikes would be needed to rein in high inflation.

After slashing the rate to a record low of 4.25% last year during the COVID-19 pandemic, the central bank has now raised it three times in 2021 to slow inflation that shot above its target in November and is on track to accelerate further.

“Our main task is to normalise the price growth rates,” Governor Elvira Nabiullina said.

She said the board had considered an even bigger rise of 75 or 100 basis points and that another rate hike was highly probable when they next meet on July 23.

Analysts polled by Reuters had forecast the key rate would rise from 5% to 5.5%, its highest since April 2020.

The rise in borrowing costs came after annual consumer inflation, the central bank’s main area of responsibility, overshot expectations and accelerated to 6% in May, a level not seen since October 2016 when the key rate was at 10%.

The central bank, which has warned inflation is set to speed up further, said increased inflationary pressures pointed to “the necessity of further increases in the key rate at the upcoming meetings”.

It said inflation had climbed to 6.15% as of June 7 and would only return to target in the second half of 2022, later than expected.

“Another 50 bp rate hike at the next policy meeting … appears very probable, after which the CBR may opt to take a pause to evaluate how this year’s aggressive rate-hiking is sifting through the economy,” Citi said in a note.

“Based on the wording, the range of the most likely key rate ceiling for this year has shifted from 5.5-6.0% to 6.0-6.5%,” ING analysts said.

Inflation expectations among Russians have reached a four-year high with the pace of economic growth exceeding expectations.

The rouble, which has been battered recently by a new wave of Western sanctions, firmed to 71.55 against the dollar after the rate announcement, its strongest since July.

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