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UPDATE 2-Russia raises key rate to 5% in face of inflationary and geopolitical risks

Andrey Ostroukh
·2-min read

* Russia hikes rates for second time in 2021

* Central bank says more rate hikes possible soon

* Higher rates designed to help tame inflation

* Rouble firmed after the rate move (Adds central bank, analyst views, details)

By Andrey Ostroukh

MOSCOW, April 23 (Reuters) - Russia's central bank raised its key interest rate to 5% on Friday, more than expected, against the background of a weak rouble, high inflation and geopolitical risks, and signalled more increases could follow.

The decision to raise the rate from 4.5% was at odds with the majority of analysts polled by Reuters. Most predicted a 25-basis-point increase after new sanctions hit the rouble and inflation showed little sign of slowing.

Russia's relations with the United States and Europe worsened significantly this month. Sanctions and diplomatic expulsions battered the rouble, posing upside risks for already high inflation.

"The rapid recovery of demand and elevated inflationary pressure call for an earlier return to neutral monetary policy," the bank said in a statement.

"The Bank of Russia will consider the necessity of further increases in the key rate at its upcoming meetings."

For the first time ever, the central bank also published a key rate trajectory, seeing its average level at 4.8%-5.4% in 2021. A rate range that is neutral from the monetary policy point of view is 5%-6%.

The central bank raised rates for the second time this year as inflation, its main area of responsibility, accelerated to 5.8% in March, its highest since 2016.

The central bank said inflation will return to the 4% target only in mid 2022, later than previously expected.

The bank raised the cost of lending after slashing the key rate to a record low of 4.25% in 2020 when the economy took a hit from a plunge in prices for oil, Russia's main export, and the coronavirus pandemic.

Lower rates support the economy through cheaper lending but can also fan inflation and make the rouble more vulnerable to external shocks.

Governor Elvira Nabiullina said the bank will consider holding rates or raising them by 25 basis points or more at future board meetings.

"The forward guidance suggests that it would be reasonable to expect a further 50 basis points in hikes this year," ING said in a note.

Citi analysts said the central bank may raise rates by 50 to 75 basis points this year. Capital Economics research firm said a 25-basis-point hike is expected in June and another one in the second half of 2021.

The next rate-setting meeting is scheduled for June 11. (Reporting by Andrey Ostroukh; additional reporting by Gabrielle Tétrault-Farber, Elena Fabrichnaya, Alexander Marrow, Katya Golubkova, Darya Korsunskaya and Anastasia Lyrchikova; editing by Larry King )