Russian rouble drops amid geopolitical noise after rate hike

  • Russian hikes key rate by 100 bps to 8.5%
  • Rouble edges lower amid geopolitical noise
  • Higher rates are positive for the rouble

MOSCOW, Dec 17 (Reuters) - The Russian rouble edged lower on Friday, caught between the opposing forces of geopolitics and the central bank raising rates for the seventh time this year in an attempt to rein in surging inflation.

Russia said on Friday it wanted a legally binding guarantee that the NATO military alliance would give up any military activity in Eastern Europe and Ukraine, part of a wish list of ambitious security guarantees it wants to negotiate with the West. read more

Meanwhile, the central bank hiked rates sharply to 8.5%, increasing the cost of borrowing again in an effort to tame inflation, which is hovering near a six-year high, and did not rule out further rate rises. The move was largely priced in by the market and was forecast in a Reuters poll. read more

Rouble volatility increased around the time the bank announced its 100-basis-point rate hike, but by 1316 GMT it had calmed to stand 0.2% weaker against the dollar at 73.89 .

It also lost 0.2% versus the euro to trade at 83.71 .

Geopolitical risk has plagued Russian assets in recent weeks. The West is concerned about Russia's military build-up near its border with Ukraine. Moscow has dismissed such concerns, saying it has the right to move its troops within Russian territory as it deems necessary.

Promsvyazbank analysts said the rouble could fall past the 74 mark versus the dollar if the external backdrop remains negative.

But higher rates make investments in Russian assets more appealing, although they can have a negative impact on economic growth by making lending more expensive.

"The rouble... will remain supported by high rates," said Dmitry Polevoy, head of investment at Locko-Invest. "We could well see it strengthening to the 72-73 range versus the dollar before the end of the year."

Brent crude oil , a global benchmark for Russia's main export, was down 1.8% at $73.66 a barrel, hampering Russian stock indexes.

The dollar-denominated RTS index (.IRTS) was down 1% to 1,588.0 points. The rouble-based MOEX Russian index (.IMOEX) was 0.7% lower at 3,724.7 points.

Reporting by Alexander Marrow; Editing by Rashmi Aich, Kirsten Donovan

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