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Central Bank raises key rate because of sanctions

Credit: Natalya Seliverstova | RIAN

The Bank of Russia announced an increase in its key rate by 0.25 pp to 7.75% per annum, the second rate hike the Russian regulator introduced this year, Interfax reports.

The previous 0.25 pp rise was made in September 2018, the first time the central bank had raised the key rate since late 2014 – prior to that, the regulator only lowered its key rate. The decision was explained by the need to stabilize the weakening ruble; this time around, the move is described as proactive and is also aimed at limiting inflation risks that remain elevated, especially over the short-term horizon, the regulator said in a statement. The Bank of Russia forecasts annual inflation to be 5-5.5% by the end of 2019 and its return to 4% in 2020.

The regulator’s decision had been included in market expectations, Vice-President of the Loko-Bank Board Andrei Lyushin said, adding that such a policy may be associated with the sanctions against Russia.

“The Central Bank had not ruled out a rate hike aimed to protect the ruble from future sanctions threats, to cushion the shock and prevent high volatility,” Lyushin said.

In his opinion, the move is likely to strengthen the ruble in the short term and give it room for growth. As for the possibility of new sanctions, the effect will not be as strong, the expert said. On the other hand, if there are no new sanctions, the Central Bank will have the possibility to lower the rate in the future.

Even so, the decision still came somewhat unexpected for market participants, said Anastasia Sosnova, analyst at Freedom Finance investment company.

“There were no serious reasons for raising the rate just now, as the ruble was relatively stable and inflation expectations remained steadily high,” she added.

However, the regulator apparently decided to act proactively, not waiting for the 2019 inflation risks to materialize.

“The next meeting of the Central Bank Board will be held in February, while the risks associated with the VAT rise and further sanctions will begin to materialize in January, so the regulator might be late with the decision on the rate and therefore would have to take harsher action,” Sosnova said.

The key rate determines the minimum interest at which the regulator provides (weekly) loans to private banks. A higher key rate means a rise in the cost of loans for both companies and individuals.

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