Russia cenbank raises rates, plans to resume ‘FX’ buying
Central bank cites rising inflation, impact of weaker rouble
MOSCOW, Dec 16, (RTRS): Russia’s central bank hiked its main interest rate on Friday, seeking to keep a lid on rising inflation and offset pressure on an already weak rouble after it said it would resume foreign currency purchases for state reserves.
The bank raised the rate by 25 basis points to 7.75 percent, and Governor Elvira Nabiullina flagged further possible hikes next year.
Most economists and analysts in a Reuters poll had expected no change in borrowing costs, though a significant minority forecast an increase.
“The decision taken is proactive in nature and is aimed at limiting inflation risks that remain elevated, especially over the short-term horizon,” the central bank said in a statement.
Friday’s hike was the second since September, when a slump in the rouble forced the central bank to reverse a monetary easing cycle and raise rates for the first time since 2014.
The currency has taken a hit from a global pressure on emerging market currencies and US sanctions against Russia, losing 14 percent against the dollar this year and contributing to upward pressure on inflation, which hit an annual 3.8 percent in November.
The central bank said inflation would exceed its 4 percent target in the near future and was likely to peak at around 6 percent in March or April.
It would “assess the feasibility 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 financial markets’ reaction to them,” Nabiullina said.
The bank expects GDP to rise between 1.5 and 2.0 percent this year and just 1.2-1.7 percent in 2019.
Research firm Capital Economic predicted the bank, which holds its next rate-setting meeting on Feb 8, would raise the rate to 8.00 percent early next year.
“The tone of today’s communications make clear that it wouldn’t take much to trigger another hike,” it said in a note.
Vladimir Tikhomirov, economist at BCS brokerage, said a further hike would be needed soon if inflation topped 5 percent by early February.
In tandem with Friday’s rate hike the bank announced a resumption of daily buying of foreign currency from Jan 15, which sent the rouble tumbling.
The central bank started buying foreign currency on the open market for the finance ministry’s reserves in 2017 as a means of shielding Russia from fluctuations in prices for oil, its key export.
It halted the purchases in August to ease pressure on the rouble.
Nabiullina said the central bank would resume FX buying “in full amount” and decide next year how to carry out purchases it postponed in 2018.
The rouble fell to its weakest since Dec 7 after her comments, trading down 0.8 percent at 66.80 versus the dollar.
Anna Zadornova, economist at UBS, said a high current account surplus in the first quarter, when Russian energy exports are usually strong, could help prop up the Russian currency.
“But as the current account surplus starts to roll over from the second quarter onwards, we expect the FX purchases to become a drag on the rouble exchange rate once again,” she said.