Central Banks

Russia raises key rate to 4.5% amid inflationary and geopolitical risks

The flag of Russia.
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Russia's central bank raised its key interest rate to 4.5% on Friday amid inflationary and geopolitical risks and signaled that more rate increases would follow.

The decision to raise the rate from a record low of 4.25% was at odds with a Reuters poll that forecast Russia would keep the cost of lending unchanged for the last time before embarking on a rate-hiking cycle.

"The balance of risks has shifted towards pro-inflationary ones... The Bank of Russia holds open the prospect of further increases in the key rate at its upcoming meetings," the bank said in a statement.

The central bank's move follows the rouble's recent depreciation driven by sanction fears. It is in line with its Brazilian and Turkish peers who delivered aggressive rate hikes week.

The Russian currency fell this week after U.S. President Joe Biden said his Russian counterpart Vladimir Putin would "pay a price" for efforts to meddle in the 2020 U.S. presidential election, something the Kremlin denies.

"Short-term pro-inflationary risks are also connected with stronger volatility in global markets, driven by various geopolitical developments, among other factors, which may have an effect on exchange rate and inflation expectations," the central bank said.

The central bank said that inflation, its main area of responsibility, will return to its 4% target only in the first half of 2022, later than previously expected.

Annual inflation was at 5.8% as of March 15 but is seen slowing soon, the bank said.

The central bank slashed rates in 2020, delivering the last rate cut in July, as the economy took a hit from a plunge in prices for oil, Russia's main export. The coronavirus pandemic has also buffeted the economy, which is on track to recover this year.

Lower rates support the economy through cheaper lending but can also fan inflation and make the rouble more vulnerable to external shocks.

The rouble extended gains after the rate move, trading at 73.82 against the U.S. dollar versus levels of around 73.98 seen before the announcement.

Elvira Nabiullina, governor of the central bank, will shed more light on the central bank's forecasts and monetary policy plans at an online news conference at 1200 GMT.

The next rate-setting meeting is scheduled for April 23.