* Key rate hiked by 50 bps to 8 pct
* Move said governed by high inflation, geopolitical risks
* Russia anticipates more sanctions over Ukraine-analysts
(Add analysts' comments, detail)
By Alexander Winning and Lidia Kelly
MOSCOW, July 25 The Russian central bank
unexpectedly raised interest rates on Friday, apparently
preparing for possible further Western sanctions over Ukraine
that could speed up capital flight from Moscow's already
The 28-nation EU has warned it may curb Russian access to
capital markets, arms and energy technology in response to last
week's downing of a Malaysian airliner in an area of eastern
Ukraine held by Russian-backed separatists.
The central bank, in one of its most hawkish decisions in
recent years, said the 50-basis points rate hike was governed by
concerns about high inflation and geopolitical tensions - an
apparent reference to Ukraine.
"Inflation risks have increased due to a combination of
factors, including, inter alia, the aggravation of geopolitical
tension and its potential impact on the rouble exchange rate
dynamics," the central bank said in a statement.
The $2 trillion economy is flirting with recession,
recording zero growth in the second quarter, the rouble remains
shaky and capital flight has already hit $75 billion this year.
"This has nothing to do with inflation - with the economy
failing to fire, the central bank should be cutting rates," said
Timothy Ash, head of emerging markets strategy at Standard Bank
"This is more to do with the central bank raising the
defences on the assumption that further Western sanctions are
going to follow, hiking capital flight and likely putting
downward pressure on the rouble.
The bank's decision brings the central policy rate, the
one-week minimum auction repo rate, to 8.0 percent, after
cumulative rate hikes of 200 basis points in March and April
when the rouble and stocks tumbled after the first wave of
Western sanctions on Moscow for the annexation of Ukraine's
"I counted three mentions of the word geopolitical in the
central bank statement, I think we can read something into
that," said Neil Shearing, chief emerging markets economist at
Capital Economics in London.
THE MUDDY FUTURE
The decision to raise rates is seen as another headwind for
domestic investment activity, as it makes borrowing more
expensive, and dampens gross domestic product growth, which most
analysts envisage at barely above zero this year.
But it shows the risks and the price Russia is paying for
continued involvement in the Ukrainian conflict, with investment
by domestic firms already in decline for most of recent months.
Government officials rushed to describe the sanctions impact
as "peanuts," but former Finance Minister Alexei Kudrin,
esteemed by investors, warned this week Russia had already lost
1 percent GDP growth and might lose more in coming years.
"Russia is yet to choose its decision, which it will
announce to the world in regard to settling the conflict in
Ukraine," Kudrin said in a rare criticism of the conservative
policies of the Kremlin.
The rouble, which lost 10 percent against the dollar
earlier in the year but since recovered, firmed
briefly on the central bank's decision, but later traded down
0.2 percent on the day. Stocks on rouble-denominated MICEX
were down 1.5 percent, losing 2.5 percent this week.
"The move is marginally supportive for the rouble, even
though it won't be able to stop foreign capital repatriation if
bolder sanctions are approved, while reignited pressure from
potential household demand for hard currency would only be
addressed if banks continue raising their deposit rates," Dmitry
Polevoy, chief economist at ING in Moscow, said in a note.
The rouble's spring decline contributed 0.8 of a percentage
point to annual inflation, which remains the main worry for
President Vladimir Putin's electorate, according to opinion
Inflation hit 7.8 percent in June - well above the central
banks' forecast of up to 6.5 percent for the whole of 2014.
"If high inflation risks persist, the Bank of Russia will
continue raising the key rate," the central bank said.
"Basically ... we can expect the key rate to go higher if
new risks materialise (for, example, introduction of level III
sanctions on Russia and the rouble getting seriously hit), which
is not beyond imagination," analysts at Gazprombank said in a
The decision indicates Russia is preparing for what may lie
ahead, analysts said. "Maybe the central bank has been given the
nod by their political masters in the Kremlin that this crisis
is still going to get worse before it gets better," Ash, of
Standard Bank said.
(Additional reporting by Oksana Kobzeva, Elena Orekhova,
Vladimir Abramov, Dasha Korsunskay; Writing by Lidia Kelly;
Editing by Timothy Heirtage and Philippa Fletcher)