Russia raises its key interest rate by 50 basis points; signals more

Nabiullina: Cautious approach.

The Bank of Russia unexpectedly raised its key interest rate by 50 basis points and signalled more tightening as rouble volatility contributed to inflation risks.The benchmark rate was raised to 5% on Friday, the Bank of Russia said in a statement. Thirteen economists out of 41 analysts forecast the move, while 28 expected a smaller cut, according to a Bloomberg survey. The rouble climbed more than any other major emerging-market currency.“There’s a real risk of delaying the return to neutral monetary policy,” Bank of Russia Governor Elvira Nabiullina said at a news briefing following the decision. “These risks may make it necessary for a more serious, significant increase in the rate in the future.”She added that the bank will consider further hikes and may even consider another 50 basis point increase. On Friday, the bank raised its year-end estimate for inflation to 4.7%-5.2% from 3.7%-4.2% and warned that price growth continues to run above forecast.The rouble has been hit by a series of geopolitical shocks since Nabiullina pushed through a surprise 25 basis-point rate hike last month. A faster-than-expected economic recovery from the pandemic is also adding to price growth, the central bank said on Friday.“Both the decision and commentary should be considered very hawkish,” said Dmitry Dolgin, chief economist at ING Bank in Moscow. “The wording suggests that another couple of hikes this year are quite likely.”The key rate will average at 4.8%-5.4% this year and 5.3%-6.3% in 2022, according to a trajectory published alongside the statement for the first time on Friday. The guidance suggests the room for further rates is “potentially quite large,” Dolgin said.“The central bank’s guidance is cautious on timing, but the tightening cycle has further to run. Another move could come as soon as the next meeting in June,” says Scott Johnson, Bloomberg Economics.US sanctions on sovereign debt imposed this month and tensions over a Russian troop buildup on the border with Ukraine have added to uncertainty around the outlook for the rouble, which feeds through to inflation with a lag. Bond outflows were limited after the penalties were imposed, but the central bank needs to be ready for more measures, Nabiullina said on Friday.Annual inflation eased to 5.5% as of April 19, suggesting that price growth has passed its peak after accelerating for 11 straight months. It remains well above the central bank’s 4% target, however and economists expect easing to be slow.“The important moment is that they raised the inflation forecast considerably,” said Sofya Donets, an economist at Renaissance Capital in Moscow. “We expect the key rate to be at 5.75% in September and remain at that level in 2022.”