The decision to raise the rate from 4.5% to 5% comes amid a weak ruble, high inflation and rising geopolitical tensions.
Russia’s central bank raised its key interest rate to 5% on Friday, a larger-than-expected jump against the backdrop of a weak ruble, high inflation and geopolitical risks, signaling further rate hikes to follow.
The decision to raise the rate from 4.5% was at odds with the projections of most analysts interviewed by the Reuters news agency, which predicted a moderate increase of 25 basis points after a new wave of sanctions hit the ruble. and inflation has shown little sign of slowing down.
“The rapid recovery in demand and high inflationary pressures call for a quick return to neutral monetary policy,” the bank said in a statement.
The central bank raised the rate for the second time this year as inflation, its main area of responsibility, rose to 5.8% in March, the highest since 2016.
The central bank said inflation will be between 4.7 and 5.2 percent at the end of 2021, returning to its target of 4 percent only in mid-2022, later than previously predicted.
“The Bank of Russia will consider the need for further hikes in the benchmark rate at its next meetings,” he said.
The bank will consider further increasing the cost of the loan after reducing the key rate to an all-time low of 4.25% in 2020, when the economy was hit by the collapse in oil prices, Russia’s main export. The coronavirus pandemic has also hit the economy, which is on track to recover this year.
Lower rates support the economy through cheaper loans, but they can also fuel inflation and make the ruble more vulnerable to external shocks.
The Russian currency fell this month, freeing itself from movements in other emerging markets and the price of crude oil, as it was hammered by fears of US sanctions and Russia’s military formation close to Ukraine.
Relations with the US and Europe have deteriorated significantly this month with sanctions and diplomatic expulsions, but tensions over Ukraine have eased significantly in the past two days with a withdrawal of Russian forces from the nearby border.
The ruble extended recent gains after the rate move, hitting 74.76 against the US dollar against levels of around 75 seen before the announcement.
Central bank governor Elvira Nabiullina will shed more light on the central bank’s forecasts and monetary policy plans at an online press conference at 12:00 GMT.
The next tariff setting meeting is scheduled for 11 June.