By Olga Razumovskaya
MOSCOW--The Bank of Russia raised its key interest rate on
Friday for the third time in five months in a surprise move, and
warned there may be more to come if political shocks prevent high
inflation from coming down.
The central bank had been expected to keep the rate steady after
raising it twice since early March, when Russia's annexation of
Crimea led local and overseas investors to flee for safer markets,
causing the ruble to tumble to a record low. The weaker currency
pushed up the price of imports, leading to a jump in inflation.
Instead, Friday, the central bank bumped up its main rate by
half a percentage point to 8%.
"Russia is a country which is experiencing severe outflows and
an uncertain political environment. They just don't want inflation
out of control," said Luis Costa, an analyst at Citigroup.
Despite traders and investors being wrong-footed, the market
reaction was muted. The Russian ruble edged marginally stronger
against the U.S. dollar, before slipping to trade slightly weaker,
at 35.12. Year-to-date, the ruble has weakened 7% against the
dollar, albeit with a large recovery since March. Equity markets
extended earlier losses; by midmorning, the Micex was down 1.4%
while the dollar-traded RTS index was down 1.6%.
Economists and strategists said the geopolitical tensions were
at the forefront of investors' minds, rather than monetary policy.
"The decision will do little to the foreign exchange rate, unless
political risks and risk of further Western sanctions against
Russia recede," said Michal Dybula, an economist at BNP
Paribas.
The central bank, meanwhile, is underscoring a commitment to
fighting inflation rather than tackling weak economic growth,
economists said. Russia has seen a moderate recovery in activity,
but the central bank estimates that gross domestic product growth
rate was close to zero in the second quarter.
On the other hand, consumer prices were up 7.5% on the year as
of July 21, well above the bank's 5% year-end target and 4%
medium-term target. The central bank said it expects inflation to
moderate and should end the year at around 6% to 6.5%. But it
warned that there are a number of lurking risks that could threaten
that outlook.
Those risks have increased as a result of the "geopolitical
tension" and its potential impact on the ruble. The central bank
also cited potential changes in tax and tariff policy. The
combination means inflation expectations remaining heightened and
there is a risk that inflation will exceed the target in coming
years, it said.
"Should the inflationary risks persist at a high level the Bank
of Russia will continue hiking the key rates," the central bank
said.
Josie Cox and Chiara Albanese in London
Write to Olga Razumovskaya at olga.razumovskaya@wsj.com