September 14, 2018 / 3:25 PM / 6 days ago

Russia raises rates for first time since 2014, extends FX buying pause

MOSCOW (Reuters) - The Russian central bank raised rates for the first time since late 2014 on Friday and promised not to buy foreign currency on the market until the end of this year end as it acknowledged risks of the weaker rouble and U.S. sanctions.

FILE PHOTO: Russian central bank governor Elvira Nabiullina attends a news conference in Moscow, Russia September 14, 2018. REUTERS/Sergei Karpukhin/File Photo

The central bank raised its key interest rate to 7.50 percent from 7.25 percent, bringing it back to its level in March and indicating a rate cut is unlikely on a one-year horizon.

Governor Elvira Nabiullina said the decision to raise rates was designed to limit risks of higher inflation, driven by the rouble volatility and the planned increase in vale-added tax from the next year.

“Today’s decision is the response to the increased inflationary risks,” Nabiullina said.

Further rate hikes could not be ruled out but the latest rate move is not necessarily the beginning of a monetary tightening cycle, Nabiullina explained.

To curtail exchange rate volatility and its influence on inflation over the next few quarters, the central bank also decided to extend the pause in purchases of foreign currency for the finance ministry’s reserves by the end of this year from the earlier deadline that had been set for the end of this month.

The central bank used to buy around $300 million a day last month before it suspended these purchases to limit losses in the tanking rouble, which shed around 10 percent in the recent sell-off wave that started in early August.

“Geopolitical factors have changed in August, an uncertainty around sanctions against Russia has increased,” Nabiullina said.

The rouble firmed to 67.46 versus the dollar after the central bank’s move, its strongest since Aug. 31, heading away from the more than two-year low of 70.60 it briefly touched earlier this week.

Analysts polled by Reuters had mostly expected the central bank to hold the rate at 7.25 percent, as it had done at three previous board meetings, but had not ruled out the possibility of a rate hike either.

“The rate decision along with the pause in foreign currency purchases on the domestic market would allow to limit annual inflation growth to 5.0-5.5 percent in 2019,” Nabiullina said.

Presenting the rate decision, Nabiullina said conditions could allow for monetary easing in late 2019 or in the first half of 2020 when inflation is expected to slow to the 4 percent target.

“The tone of the Russian central bank’s press conference suggests that today’s interest rate hike was a preemptive move against an expected tightening of U.S. sanctions, not the start of a cycle,” Capital Economic research firm said in a note.

Concerns of fresh sanctions against Moscow have intensified recently as U.S. lawmakers called for a harder push back harder against Russia over allegations it sent assassins with a chemical weapon to kill a former spy in Britain.

If new sanctions are not applied, the central bank may still need to raise rates, Renaissance Capital said in a note.

RenCap said it sees the key rate at 8 percent in the first quarter of 2019, expecting two more 25 basis point hikes in December and March.

The next rate-setting meeting this year is scheduled for Oct. 26.

Additional reporting by Katya Golubkova, Elena Fabrichnaya and Maria Kiselyova; Editing by Matthew Mpoke Bigg

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