Russia raises key rate to 6.5% in sharpest move since 2014

A Russian state flag flies over the Central Bank headquarters in Moscow, Russia March 29, 2021. A sign reads: “Bank of Russia”. REUTERS/Maxim Shemetov/File Photo

MOSCOW, July 23 (Reuters) – Russia’s central bank increased its key interest rate to 6.5% on Friday, delivering its sharpest rate hike since late 2014 amid stubbornly high inflation, and indicated that further rate increases were possible.

The decision to raise the rate from 5.5% (RUCBIR=ECI) was in line with a majority of analysts polled by Reuters beforehand, who predicted the central bank would opt for a 100-basis hike after raising rates by 50 basis points last month.

The Bank of Russia hiked rates for the fourth time this year as annual consumer inflation, its main area of responsibility, overshot expectations and accelerated to 6.5% in June, reaching its highest since August 2016 when the key rate was at 10.5%.

“If the situation develops in line with the baseline forecast, the Bank of Russia will consider the necessity of further key rate increase at its upcoming meetings,” the central bank said in a statement.

The central bank said inflation was at 6.5% as of July 19 and will finish this year at 5.7-6.2% before returning to 4.0-4.5% in 2022. The central bank targets inflation at 4%.

High inflation dents living standards and has been one of the key concerns among households ahead of September parliamentary elections where the ruling party United Russia is widely expected to retain its dominance.

Higher rates help tame consumer inflation with more expensive lending and increased appeal for bank deposits, while also supporting the rouble by buttressing demand for Russia’s high-yielding assets.

The rouble was largely unchanged after the rate move, hovering at 73.65 against the dollar .

On the flip side, more expensive lending hampers economic recovery.

But the central bank said it revised forecasts and now expects the economy to grow by 4.0-4.5% in 2021 versus its earlier call for 3-4% growth.

Elvira Nabiullina, governor of the central bank, will shed more light on the central bank’s forecasts and monetary policy plans at an online news conference at 1200 GMT.

The next rate-setting meeting is scheduled for Sept. 10.

Reporting by Andrey Ostroukh, Alexander Marrow, Elena Fabrichnaya, Anton Kolodyazhnyy; Editing by Andrew Osborn

Our Standards: The Thomson Reuters Trust Principles.

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