Russia’s central bank raises interest rates to five-year high

Russia’s central bank has raised its key interest rate by 100 basis points to a five-year high of 9.5 per cent and said it was leaving scope for further increases in the short term as geopolitical risks and a tight labour market put pressure on inflation.

“Inflation is far above the Bank of Russia October forecast,” the bank said on Friday.

Elvira Nabiullina, the bank’s governor, said at a press conference that there had been no “U-turn” to allow the bank to see a sustained inflation slowdown. “We expect such a slowdown by the end of the first quarter [or in] the second quarter. But we will not be able to call it a trend until later.”

The bank’s decision to raise rates for the eighth time since last March comes against a backdrop of growing tension between the west and Russia over Ukraine. The US and its allies have threatened sanctions against Russia, which has amassed troops at the border with its southwestern neighbour, in case of an escalation of threats towards Kyiv.

Nabiullina noted “increased geopolitical risks” and said other external factors included a continued rise in prices of energy and other commodities including food.

The bank also said rapid economic growth and labour shortages were increasing inflationary pressures.

“If we do not take steps to return [the economy] to balanced growth, its overheating will strengthen and will lead to uncontrolled inflation acceleration and a subsequent economic growth slowdown,” Nabiullina said.

Russia’s gross domestic product is expected to grow between 2 per cent and 3 per cent this year, and a further 1.5 per cent to 2.5 per cent next year.

Russia’s central bank has been one of the world’s most aggressive in raising rates to try to curb inflation, which is stoking mounting concern for monetary policy worldwide.

The bank allowed for a potential further rate increase at its next meeting, scheduled for March 18.

Its policy aim remains to return inflation to 4 per cent next year. This year, the bank forecasts annual inflation of 5 per cent to 6 per cent. In January inflation hit 8.7 per cent, and rose further in early February, it said.

Russia’s central bank was “far closer to completing the rate hike cycle than most regulators in the world”, said Konstantin Svyatny, chief portfolio manager at Aton brokerage.

The rouble traded at about 75 to the dollar on Friday, having strengthened from close to 80/$ since late January, when Ukraine tensions hit the market.

Analysts at BCS Global Markets said the latest rate increase was priced in and should not have an impact on the rouble.

The central bank “seems to be inclined to keep the rate relatively high for longer, as some advanced economies have already entered the rate hike cycle, which implies a weakening of emerging market currencies, including the rouble”, the analysts said.