June 9 (Bloomberg) -- Russia's central bank raised its main interest rates by a quarter point for the third time this year, effective tomorrow, to limit an inflation rate that reached a five-year high in May.

The refinancing rate, seen as a ceiling for borrowing rates, will be increased to 10.75 percent, Moscow-based Bank Rossii said on its Web site today. The minimum rate for taking out one-day loans from the central bank in repurchase auctions will increase to 6.75 percent.

``It's a sign of commitment from Russian policy makers that they're very serious about stabilizing inflation and bringing it lower,'' said Martin Blum, head of emerging-markets economics and strategy in Vienna at UniCredit MIB, a unit of Italy's third- largest bank by assets. ``They'll probably keep the pace of tightening up.''

The central bank lifted Russia's key rates by a quarter point on April 28 and on Feb. 4 to damp growth in consumer prices. The annual inflation rate rose to 15.1 percent in May from 11.9 percent in 2007. The government is targeting inflation of between 9 and 10.5 percent this year.

Russian interest rates will probably be raised by another 75 basis points before the end of the year as the central bank struggles to rein in inflation, Blum said. A basis point is 0.01 of a percentage point.

Ruble Appreciation

While higher rates and the recent increase to the level of reserves local commercial banks are required to hold will help, the central bank must also let the ruble appreciate this year if it is to make a dent in inflation, Blum added.

Bank Rossii let the ruble, which it fixes within a trading band against a basket of foreign currencies, gain by 1.3 percent last year to reduce prices on imported goods. The bank is ``not ruling out'' expanding the trading corridor and letting the ruble rise in the next few months, bank Chairman Sergey Ignatiev said on May 29, according to Interfax.

``They can't just rely on raising interest rates because the level of transmission to consumers isn't very strong in Russia,'' Blum said. ``And if they keep hiking rates but don't let the ruble go stronger it just brings more inflationary inflows in.''

The currency rose to as high as 29.5664 today against the basket, which is made up of 0.55 dollars and 0.45 euros, before paring back to 29.6591 by 2:08 p.m. in Moscow.

Banks including Merrill Lynch & Co., Goldman Sachs Group Inc. and Deutsche Bank AG predict the central bank will be forced to let the currency gain as much as 4 percent this year.

The one-day swap rate, which the central bank charges for providing rubles in exchange for dollars or euros, will also increase, to 8.75 percent, the central bank said.

Russia's economy is showing ``serious signs'' of overheating, Finance Minister Alexei Kudrin said today, according to an e- mailed transcript of an interview with state broadcaster Russia Today. As demand outpaces growth, imports and consumer prices are increasing at a ``very dangerous'' pace, he said.

To contact the reporter on this story: Emma O'Brien in Moscow at eobrien6@bloomberg.net

Last Updated: June 9, 2008 06:39 EDT