Russia’s central bank unexpectedly raised interest rates for the first time since 2014, following its counterparts across emerging economies as inflation risks mount with a slumping currency and threats of U.S. sanctions.
Policy makers signaled more rate hikes are possible after raising their benchmark to 7.5 percent, a level last seen in March, from 7.25 percent, according to a statement on Friday. Only two of 42 economists surveyed by Bloomberg had predicted an increase. The ruble flipped to gains after the decision, rallying for the best performance in emerging markets.
In a sign of concern that the ruble will remain under pressure for months, the central bank will also extend its suspension of foreign-currency purchases until the end of December. By making imports more expensive, a weakening exchange rate threatened to fan price growth, with policy makers sharply increasing their forecasts for inflation on Friday.
“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 in the statement. “Annual inflation is returning to 4 percent faster than expected.”
Governor Elvira Nabiullina, who first broached the possibility of a rate hike earlier this month, will hold a news conference at 3 p.m. in Moscow, followed by the release of updated economic forecasts.
Turning a page on almost four years of monetary easing, the central bank ended a pause that started after U.S. sanctions in April sent markets into a nosedive and revived the risk of inflation. Even though Turkey’s decision a day earlier to raise rates more than expected took some of the heat off Russia to follow suit, Nabiullina opted for a hike despite appeals from top government officials before the meeting. A Kremlin economic aide called such a move “highly undesirable.”
The ruble rallied after the rate announcement, trading 1.1 percent stronger as of 2:05 p.m. in Moscow. Before the decision, it had lost more than 8 percent since the last time the central bank reviewed rates at the end of July. The Russian currency’s one-month implied volatility is among the highest globally.
“The surprising decision to raise rates implies that Russian policy makers are more concerned about the inflationary consequences of the ruble rout than both we and the market had anticipated,” said Piotr Matys, an emerging-markets currency strategist at Rabobank in London.
While already opting to confront risks with a rate hike, the central bank also has recourse to other tools, including the emergency-funding instrument of offering foreign-currency repurchase agreements. In August, it paused sales of rubles to purchase foreign exchange after threats of new U.S. sanctions unsettled the market.
The central bank said inflation is on track to reach its target of 4 percent already this year. Annual price growth should peak in the first six months of 2019, reaching 5 percent to 5.5 percent by the end of next year and then slowing to 4 percent in the first half of 2020, according to the statement on Friday.
Inflation expectations among households — which the central bank calls a “pillar” of its rate decisions — rose in August to 9.9 percent, more than triple the current inflation rate and the highest reading in almost a year.
“It appears the Russian central bank is ready to hike further in case of a tightening of sanctions regime despite the consequent negative effects on economic activity,” said Inan Demir, an economist at Nomura International Plc in London.