Russia Raises Rate For First Time Since 2014 In Surprise Move
September 14 2018 - 5:23AM
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Russia's central bank unexpectedly raised its key interest rate
for the first time since 2014 on Friday, citing significant
increase in inflation risks due to highly uncertain external
conditions.
The Board of Directors decided to raise the key rate by 0.25
percentage points to 7.50 percent, the Bank of Russia said in a
statement. Economists had expected the bank to hold the rate
steady.
The bank also decided to suspend foreign currency purchases in
the domestic market through the end of the year. This move is
expected to help to curtail the exchange rate volatility and its
influence on inflation, over the next few quarters.
Following the announcement, Bank of Russia Governor Elvira
Nabiullina said risks referred to those of mounting inflation and
inflation expectations in response to exchange rate volatility as
well as the forthcoming VAT rise.
"Moving forward, we will look into how feasible a further
increase in the key rate will be, taking into account inflation
movements and economic performance against the forecast, as well as
external environment-side risks and financial markets' response,"
she said.
The central bank forecast annual inflation to be 3.8-4.2 percent
this year, 5-5.5 percent in 2019 and return to 4 percent in
2020.
Growth forecast for this year was left unchanged at 1.5-2
percent. The projections for next year was updated to 1.2-1.7
percent, considering the upcoming VAT increase and a boost in
government spending. The forecast for 2020 was raised to 1.8-2.3
percent.
"Economic growth might accelerate over the next few years
provided that structural changes are successfully implemented,"
Nabiullina said.
"Economic growth pick-up will come without greater inflationary
pressure," she added.
"Together with the ban on FX purchases, this [the rate hike]
will add stability to the local FX market," ING Bank analyst Egor
Fedorov said. The analyst expects more aggressive sanctions against
Russia to be debated in the US Congress into and after mid-term
elections.
"Given a backdrop of rising US rates and unresolved trade
issues, we maintain a view that USD/RUB will be trading back above
70 over coming weeks and months," Fedorov added.
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