Russia raises key rate to 7.5%, signals more hikes possible

MOSCOW: Russia's central bank increased its key interest rate sharply to 7.5% on Friday, delivering its sixth hike this year in an effort to tame the highest inflation since early 2016, and indicated that more rate rises were still possible.

The decision to raise the rate by 75 basis points sparked a rally in the rouble, surprising the market which had on average expected the central bank would opt for 50 bps after raising rates by 25 bps in September.

"If the situation develops in line with the baseline forecast, the Bank of Russia holds open the prospect of further key rate rises at its upcoming meetings," the central bank said in a statement, using the same wording as a month ago.

The central bank raised its 2022 average rate projection to 7.3-8.3% from 6.0-7.0%, sending a hawkish signal to the market and buttressing the rouble.

The rouble rallied past 70 versus the dollar for the first time since June 2020, moving away from levels of around 70.50 seen shortly before the rate hike.

IMF raises Russia's 2021 economic growth forecast

The central bank also revised its forecasts and now expects inflation to reach 7.4-7.9% in 2021, above its previous call for a 5.7-6.2% increase in consumer prices this year.

The central bank, which targets inflation at 4%, said inflation was at 7.8% as of Oct. 18 but was on track to return to 4.0-4.5% in 2022.

High inflation dents living standards and has been one of the key concerns among households, prompting authorities to offer social support payments that can in turn spur inflation further.

Higher rates help tame consumer inflation by pushing up lending costs and increasing the appeal of bank deposits.

Higher rates are also supportive of the rouble, while expectations that the rate-hiking cycle is close to its peak and will reverse at some point could spur inflows of foreign funds into Russian treasury bonds.

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 Dec. 17.