Russian central bank raises key rate for first time since 2014

0 Comment(s)Print E-mail Xinhua, September 15, 2018
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The Russian Central Bank on Friday raised its key lending rate unchanged in six months by 0.25 percentage points to 7.5 percent on higher inflation expectations.

It was the first rate hike since 2014 when a currency crisis broke out following Western sanctions.

"Changes in external conditions observed since the previous meeting of the Board of Directors have significantly increased pro-inflationary risks," it said in a statement.

The bank now forecasts Russia's annual inflation to be 3.8-4.2 percent this year, compared to its previous forecast of 3.5-4.0 percent.

Annual inflation will peak in the first six months of 2019, reaching 5.0-5.5 percent by the end of 2019, it said.

In July, it said that the inflation could temporarily exceed the previously targeted 4 percent next year due to the increase in the value-added tax (VAT) to 20 percent from 18 percent in 2019.

However, the bank expects that the quarterly consumer price growth rate will draw close to 4 percent in the second half of 2019 and annual inflation will slow down to 4 percent in the first half of 2020 when the effects of the ruble's weakening and the VAT rise peter out, it said in the Friday's statement.

The Russian ruble has lost nearly 20 percent of its value in recent months as a result of multiple U.S. sanctions. It went beyond 70 per U.S. dollar on the Moscow exchange on Monday for the first time since March 2016 due to fears of new sanctions.

The bank warned that it could increase the key rate further, "taking into account inflation and economic dynamics against the forecast, as well as risks posed by external conditions and the reaction of financial markets."

Further yield growth in advanced economies, capital outflow from emerging markets together with geopolitical factors might cause volatility in financial markets to persist, and affect exchange rate and inflation expectations, it said.

The bank recalled that the country's current account balance remained high thanks to the stable prices of Russian export goods, significantly exceeding the amount of external debt repayments scheduled for the coming months.

This allowed the central bank to suspend foreign currency purchases in the domestic market to curtail exchange rate volatility.

On Aug. 23, the central bank said it has decided not to purchase foreign currency on the domestic market till the end of September.

Updated bank's estimates for the second quarter of 2018 showed that annual growth of gross domestic product (GDP) in Russia stood at 1.9 percent, in line with previous expectations, the statement said.

The bank therefore kept unchanged its 2018 annual GDP growth forecast of 1.5-2 percent, it said.

But the bank expects Russia's GDP growth in 2019 to be in the range of 1.2-1.7 percent due to the VAT rise.

The following years might see higher growth rates due to implementation of structural measures set by the government, it said.

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