* Central bank hikes all key policy rates by 25 basis points
* Cites inflation overshoot, mid-term risks, for move
* Monetary drivers, one-off factors, push up inflation
* Russia hikes as other emerging markets ease
By Jason Bush
MOSCOW, Sept 13 Russia's central bank raised all
of its key interest rates by a quarter point on Thursday, in a
surprise move that reflected its concern about inflation after
consumer price growth overshot its 6 percent target.
The move bucks the trend in other major economies where weak
growth is putting pressure on central banks to keep rates low,
or else cut them - as the fellow BRIC countries Brazil, India
and China have all done recently.
It reinforces how Russia is in many ways facing different
challenges from those preoccupying western policy makers, on a
day when the U.S. Federal Reserve endorsed a third round of
bond buying to pump money into the economy.
Although Russia is also battling an economic slowdown, its
policy makers are presently more concerned by rising prices,
which mean the central bank is in danger of failing to meet its
inflation target of 5-6 percent for 2012.
Annual inflation was running at around at 6.3 percent in
mid-September, exceeding the year-end target for 2012.
"The decision was made in view of prices and inflation
expectations growth, which increases the risks of exceeding the
medium-term inflation targets of the Bank of Russia," the bank
said after its monthly policy meeting.
The across-the-board increase takes the refinancing rate to
8.25 percent, the one-day fixed repo rate to 6.5 percent, and
the overnight deposit rate to 4.25 percent.
The central bank is gradually shifting its focus away from
managing the exchange rate to formal inflation targeting.
"From the point of view of market indicators, the central
bank did everything correctly," said Nikolai Podguzov, analyst
at VTB Capital. "The logic of inflation targeting prescribes
Clamping down on inflation is also an important political
goal in a country where rising prices are among the biggest
public concerns, especially among elderly voters who are core
supporters of President Vladimir Putin.
A majority of analysts had nevertheless expected the central
bank to leave rates on hold this month, although it has hinted
in recent months that a rise was possible.
"I am very much surprised," said Ivan Tchakarov, chief
economist for Russia and the CIS at Renaissance Capital in
Moscow. "You should be increasing rates when the economy is
overheating, but not when there is a supply shock - the bad
harvest - in particular when they are facing an economic
slowdown in the second half of the year."
CREDIBLE INFLATION TARGETING
Economists have been divided over the correct course for
interest rates. Some had said before the decision that a failure
to raise rates could be seen as a concession to business lobbies
who benefit from cheaper lending and a weaker rouble.
"Since the central bank's job is to address the long-term
inflation trend and inflation expectations, they have to react
to the increase in inflation expectations that has taken place,"
said Alexander Morozov, chief Russia economist at HSBC, who had
expected the central bank to raise key policy rates.
"Other economists were paying too much attention to base
effects and food price inflation ... They underestimated the
increasing role of monetary factors in how inflation is being
The central bank noted core inflation had gradually
accelerated to 5.5 percent in August and played down recent
signs of a slowdown in Russia's economy - a factor that many
economists had believed would lead it to resist rate rises.
The central bank noted that while growth in investment and
retail sales decelerated in July - the most recent data -
industrial output is recovering, producer confidence remains
fairly strong, the labour market is tight and credit growth
Some analysts nevertheless believe that the central bank has
underestimated the downside risks.
"It seems to me that this is an incorrect decision," said
Anton Stuchenevsky, economist at Troika Dialog, "...which may
negatively impact economic growth."
Analysts said the surprise hike would be bullish for the
rouble and bonds, but negative for stocks, increasing borrowing
costs and weighing on economic growth.
Higher interest rates in Russia increase the attraction of
carry trades, whereby investors use low-yielding currencies such
as the dollar to buy instruments offering higher returns.
The central bank's determination to reduce inflation may
also boost the real return on rouble investments.
"This is not a negative event for Russian bonds, rather it's
a strong signal that the priority will be to address inflation,"
said Elena Kolchina, head of fixed income at Renaissance Asset
The benchmark MICEX stocks index was down 0.4 percent
on the day while the rouble rallied, firming to 31.30 per dollar
from 31.42 before the rate rise announcement.