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Russia Unexpectedly Raises Rates as Inflation Risks Mount

Published 14/12/2018, 10:53
Updated 14/12/2018, 11:42
© Bloomberg. The crest of the Russian Federation sits on display at the headquarters of Bank Rossii, ahead of a news conference to announce interest rates in Moscow, Russia, on Friday, June 16, 2017. Russia's central bank slowed its pace of monetary easing with the third cut in borrowing costs this year as policy makers shift the focus to keeping inflation near their target. Photographer: Andrey Rudakov/Bloomberg

© Bloomberg. The crest of the Russian Federation sits on display at the headquarters of Bank Rossii, ahead of a news conference to announce interest rates in Moscow, Russia, on Friday, June 16, 2017. Russia's central bank slowed its pace of monetary easing with the third cut in borrowing costs this year as policy makers shift the focus to keeping inflation near their target. Photographer: Andrey Rudakov/Bloomberg

(Bloomberg) -- Russia’s central bank unexpectedly increased borrowing costs for the second time this year ahead of a spike in inflation next quarter from a tax hike and possible U.S. sanctions.

“The central bank will consider further key rate increases based on inflation and economic dynamics relative to forecasts, as well as risks posed by external conditions and the reaction of financial markets,” the central bank said in a statement.

The key interest rate was increased by 25 basis points to 7.75 percent, according to the statement. The decision was forecast by 16 of 42 economists surveyed by Bloomberg, with the rest predicting a hold. Regular foreign-currency purchases that were suspended to stem a slide in the ruble earlier this year will resume from Jan. 15, the regulator said.

The move will give extra protection to the ruble as it heads into a potentially tumultuous quarter after a more-than 13 percent plunge this year. The purchases could add to pressure from the ongoing threat of more U.S. sanctions. Inflation is edging closer to the central bank’s 4 percent target and will spike next quarter after a value-added tax increase kicks in.

“They’ve opted for a defensive hike, which will leave room to cut again in September-December,” said Dmitry Polevoy, chief economist at the Russian Direct Investment Fund. “It’s clearly good news for the ruble.”

Governor Elvira Nabiullina will hold a news conference at 3 p.m. in Moscow.

The ruble pared a decline after the rate announcement, trading 0.2 percent weaker at 66.3625 per dollar. The yield on Russia’s 10-year local-currency bonds was unchanged at 8.7 percent.

Annual inflation accelerated for a sixth month to 3.9 percent as of December 10, edging close to the central bank’s target of 4 percent, the central bank said in today’s statement. It may reach 5.2 percent by the end of March, according to a Bloomberg survey.

The resumption of FX purchases “will contain any strengthening of the ruble,” said Vladimir Miklashevsky, a strategist at Danske Bank A/S in Helsinki. “Given the current uncertainty in external factors and the central bank’s conservatism, at least one hike in 2019 is highly likely.”

© Bloomberg. The crest of the Russian Federation sits on display at the headquarters of Bank Rossii, ahead of a news conference to announce interest rates in Moscow, Russia, on Friday, June 16, 2017. Russia's central bank slowed its pace of monetary easing with the third cut in borrowing costs this year as policy makers shift the focus to keeping inflation near their target. Photographer: Andrey Rudakov/Bloomberg

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