Russia hikes key rate to 7.50%, extends pause in FX buying

The Russian central bank on Friday hiked its key interest rate to 7.50 percent and said it would not make any foreign currency purchases until the end of the year, citing the risk of higher inflation and rouble volatility.

It was the first time the central bank had raised the key rate since late 2014 when it had to step in to help stabilise the tanking rouble.

The rouble firmed after the decision, trading at 67.88 versus the dollar compared with 68.41 shortly before.

“The increase of the key rate will help maintain real interest rates on deposits in positive territory, which will support the attractiveness of savings and balanced growth in consumption,” the central bank said in a statement.

Analysts polled by Reuters had mostly expected the central bank to hold the rate at 7.25 percent, as it had done at three previous board meetings, but had not ruled out the possibility of a rate hike either.

The bank’s decision to extend a pause in daily FX buying until the end of 2018 from the end of September will help curtail exchange rate volatility and its influence on inflation over the next few quarters, the central bank said.

Explaining its thinking, the central bank said “changes in external conditions observed since the previous meeting of the Board of Directors have significantly increased pro-inflationary risks.”

Annual inflation is rising more than expected, the central bank said, adding that it expected it to peak in the first half of 2019 and reach 5.0-5.5 percent by the end of 2019.

“The Bank of Russia will consider the necessity of further increases in the key rate, taking into account inflation and economic dynamics against the forecast, as well as risks posed by external conditions and the reaction of financial markets,” it said.

The next two rate-setting meetings this year are scheduled for Oct. 26 and Dec. 14.

Source: Reuters