Russian central bank expected to raise rates in tough call

MOSCOW: Russia's central bank is expected to raise interest rates at a board meeting on Friday as it grapples with a falling rouble and rising inflation.

But its decision will be tough, as higher interest rates will also weigh on economic growth, which is already slowing sharply as falling oil prices, Western sanctions imposed over Ukraine and tight monetary policy push Russia towards recession.

"The regulator has to take a difficult decision, and whatever choice they make will probably provoke a wave of criticism," BCS analyst Vladimir Tikhomirov said in a note.

Analysts polled by Reuters this week predicted on average that the bank would raise its key lending rate by 50 basis points to 8.5 percent, the fourth rate hike this year.

Some analysts have been calling for a steeper increase. In a note, Simon Quijano-Evans, head of emerging market research at Commerzbank, called for "a meaningful rate hike of at least 200 basis points".

The central bank has spent more than $20 billion in forex reserves this month to slow the slide in the rouble, which has lost 20 percent against the dollar since mid-year.

The bank formally bases its rate decisions on its view of inflation trends. But with annual inflation now above 8 percent and rising, this also argues for higher interest rates, most analysts believe.

Although scheduled to discuss interest rates, Friday's central bank meeting is also being closely watched for statements or signals about the bank's exchange rate policy.

There is speculation that the bank may bring forward a float of the rouble planned for the end of the year, possibly combining this with a new intervention policy under which it will make larger but irregular forex interventions.

This follows criticism that the bank's present policy, in which it intervenes in measured amounts at the edge of the rouble's corridor against a dollar-euro basket, is encouraging bets against the rouble and wasting reserves.

A sharp 3 percent jump in the rouble on Thursday - reversing several days of steep declines - has fuelled rumours that the bank may already have changed its intervention policy to enable a more robust defence of the currency.

Other theories for the surprise rally have also been offered, however, including rumours of a deal between Ukraine and Russia over Crimea and a deal between the two countries over the supply of gas.