Russia Raises Key Interest Rate to 5%

The Central Bank of Russia  decided to raise its key interest rate to 5% on Friday, more than expected, on the back of weak ruble, high inflation and geopolitical risks, and indicated that further increases could follow.

The decision to raise the rate from 4.5% was against the majority of analysts polled by Reuters. Most expected a 25 basis point increase after new sanctions hit the ruble and inflation showed few signs of slowing.

"The rapid recovery of demand and high inflation pressure warrants an early return to neutral monetary policy," the bank said in a statement.

The central bank raised the cost of lending after cutting the key interest rate to a record low of 4.25% in 2020 when the economy was hit by low oil demand and thus prices due to the pandemic.

Lower lending rates can support the economy and provide stimulus, yet, it can also increase inflation and make the ruble weaker.

Governor Elvira Nabiullina said the bank could maintain or raise interest rates by 25 basis points or more at future board meetings.

"Future guidance indicates that it would be reasonable to expect another 50 basis points in rallies this year," ING said in a note.

Meantime, the ruble dropped against the dollar to record 74.87 after recording 77.01 on Wednesday.