By Paul Hannon
Russia's central bank raised its key interest rate, a move that may help support the ruble amid tensions with the West, but also reflects a recovery that it expects will lift economic output to its pre-pandemic level by the middle of 2021.
The Bank of Russia raised its main rate to 5% from 4.5%, having last increased borrowing costs on March 19. Like its peers around the world, the central bank cut its interest rate sharply during the early stages of the pandemic, to support the economy.
The bank said Friday that it expected inflation to be higher than previously anticipated, citing a rebound in demand as Russia's Covid-19 vaccination program progressed. It also said it may raise rates further, to bring the inflation rate down to its 4% target, from 5.8% in March.
"The rapid recovery of demand and elevated inflationary pressure call for an earlier return to neutral monetary policy," it said.
The central bank signaled concern about other developments that could push inflation higher. Its rate move follows the Biden administration's decision this month to bar U.S. banks and institutional investors from buying new Russian government ruble-denominated bonds at auction from June 14. This was presented as retaliation for Moscow's alleged interference in U.S. elections and widespread hacking campaign.
"Short-term pre inflationary risks are also associated with the stronger volatility in global markets, caused in part by various geopolitical developments," the central bank said.
Earlier prohibitions targeting Russia's sovereign debt shook its markets and added to its economic woes. While investors' response to the latest sanctions was more subdued, a weaker ruble would push prices of imported goods and services higher.
The central bank's move also comes amid worries that strong growth in the U.S. will push interest rates there higher, leading to destabilizing outflows of capital from developing economies.
Raising interest rates to counter that and other inflation threats risks weakening the economic recovery from the pandemic, presenting central banks in countries such as Russia with a tricky dilemma.
Nonetheless, Russia's central bank appears to have the backing of President Vladimir Putin.
"The government and the central bank must continue to pursue a responsible financial policy," Mr. Putin said Wednesday. "Ensuring macroeconomic stability and containing inflation within set parameters is an extremely important task."
Write to Paul Hannon at email@example.com
(END) Dow Jones Newswires