Ruble Jumps After Russia Surprises With Bigger Than Expected Rate Hike

While the Fed refuses to acknowledge that the US has an inflation problem, most emerging market countries have no such luxury and just days after the Bank of Canada tapered its QE for the second time, this morning Russia became the latest country to surprise markets when it unexpectedly hiked its key rate by 50 basis points – more than the 25 expected by consensus – and signaled more tightening as ruble volatility amid a deepening standoff with the West contributed to rising inflation risks.

The Bank of Russia raised the benchmark rate to 5% on Friday, a move expected by just thirteen economists out of 41 analysts while 28 expected a smaller cut.

“The Bank of Russia will consider the necessity of further increases in the key rate at its upcoming meetings,” according to the central bank statement. The bank also raised its year-end estimate for inflation to 4.7%-5.2% from 3.7%-4.2% and warned that price growth continues to develop above forecast, indicating that more tightening is forthcoming. Indeed, central bank governor Elvira Nabiullina left little doubt the hawkish approach to counter inflation will continue, and said future hikes could also be higher than 25 basis points.

And while Nabiullina hardly touched on it in her presser, the market has taken a breath of relief as geopolitical tensions have eased recently, after Putin refrained from escalating the standoff with Ukraine during his Wednesday nationwide address, with jailed Russian opposition leader Alexey Navalny ending his hunger strike and Russia reducing the number of troops it placed on Ukraine’s border

As Bloomberg notes, the ruble has been hit by a series of geopolitical shocks since Bank of Russia Governor Elvira Nabiullina pushed through a surprise 25 basis-point rate hike last month, adding to inflationary pressures. A faster-than-expected economic recovery from the pandemic is adding to price growth, the central bank said on Friday. Even with the recent rate hikes, the central bank hinted that normality is still far out on the horizon, saying the key rate will only average the neutral range of 5%-6% in 2023, according to its new medium-range forecast.

The ruble extended gains versus the dollar, trading at the strongest in a month, and 10-year local bonds pared Friday’s decline.