Russia raises key rate sharply, doesn't rule out more hikes

  • Bank of Russia lifts rate by 100 bps to 8.5%
  • Governor says more than one hike still possible
  • Expects inflation to slow to 4-4.5% by end-22

MOSCOW, Dec 17 (Reuters) - Russia's central bank raised its key interest rate by 100 basis points to 8.5% on Friday and said more than one rate increase was still possible in coming months as inflation was near a six-year high.

Russia has raised the rate seven times this year from a record low of 4.25%, increasing the cost of borrowing to fight stubbornly high price pressures and expectations for inflation - its main area of responsibility - that are close to a five-year peak.

"Inflation is still high. Our decision is aimed at ensuring its reduction to the target by the end of next year," Governor Elvira Nabiullina said, announcing the rate move. read more

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Inflation shot above the bank's 4% target in 2020 and, with the latest monetary tightening, the central bank brought its key rate (RUCBIR=ECI) above the annual inflation reading, which stood at 8.1% in mid-December, for the first time in more than a year.

"We hold open the prospect of a further key rate increase at the upcoming meetings," Nabiullina said.

Friday's move was in line with a Reuters poll of analysts and took the key rate to its highest since September 2017.

Nabiullina said inflation was likely to slow in December from November's 8.4%, and the cumulative effect of the rate-hiking cycle would be fully visible in 2022.

Russia raises key rate by 100 bps to 8.5%, its highest since 2017

High inflation dents living standards and has been one of the key concerns among households, prompting President Vladimir Putin to call for pre-emptive measures. read more

Higher rates help tame inflation by pushing up lending costs and increasing the appeal of bank deposits.

Higher rates are also supportive of the rouble, while expectations that the rate-hike cycle might be close to its peak and will reverse at some point in 2022 could spur inflows of foreign funds into Russian treasury bonds.

But the rouble slipped on Friday, taking a hit from a volatile political backdrop. read more

Capital Economics said it now expects a further 75-basis-point rate hike at the next board meeting on Feb. 11 when the bank will present new economic forecasts.

Sinara Bank said the rate can climb to 9.5% in the first half of 2022, while Citi predicted a hike of up to 50 basis points in the first quarter and a transition into rate cuts towards the end of next year.

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Additional reporting by Alexander Marrow, Gabrielle Tétrault-Farber, Alexander Marrow, Katya Golubkova, Elena Fabrichnaya, Anastasia Lyrchikova, Daria Korsunskaya, Maria Kiselyova, Oksana Kobzeva; Editing by Mark Trevelyan and Edmund Blair

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