Russia Unexpectedly Raises Benchmark Interest Rate Quarter Point to 8.25%

Russia’s central bank unexpectedly increased its benchmark rate for the second time this year to quell inflation.

Bank Rossii raised the refinancing rate to 8.25 percent from 8 percent, it said on its website today. Fifteen of 20 economists in a Bloomberg survey expected no change. Policy makers in Moscow also increased the deposit rate a quarter point to 3.25 percent and the overnight auction-based repurchase rate by the same amount to 5.5 percent. The change is effective May 3.

The inflation rate has been above the central bank’s target of between 6 percent and 7 percent for this year since October, driven by rising food and fuel prices. The European Central Bank lifted interest rates this month for the first time in almost three years, while regulators in Brazil, India and China raised borrowing costs at least four times in the past year.

"The decision was made due to continued high inflation expectations, exceeding inflation guidelines for the year, and also noting the mixed effect on the Russian economy of the trends on global financial and commodities markets," the bank said in its statement.

The ruble was 0.8 percent higher against the dollar at 27.3000 and 0.4 percent stronger at 40.5875 per euro at 12:57 p.m. in Moscow.

‘Doesn’t Begin’

The Russian central bank had relied on currency gains and higher reserve requirements for lenders to quell inflation, seeking to avoid choking economic growth. Modernizing the economy, a priority for President Dmitry Medvedev, "practically doesn’t begin" with inflation above 7 percent, Finance Minister Alexei Kudrin said April 21.

"The central bank wouldn’t like to hurt the recovery in credit and investment by hiking its benchmark rate, not until inflation threat becomes real," Vladimir Tikhomirov, chief economist at Moscow-based Otkritie Financial Corp., said by e- mail before the release. "They’d like to narrow the gap between various rates, so they can make another move in deposit/repo rates."

The economy grew 4 percent last year after a 7.8 percent contraction in 2009. The Economy Ministry expects gross domestic product to expand 4.2 percent this year before slowing to 3.5 percent in 2012. Medvedev said in February that Russia should seek growth of as much as 10 percent a year within five years to keep up with the pace of rival so-called BRIC developing economies.

February Increase

Russia raised all of its main policy rates in February, adding to a quarter percentage point increase to the deposit rate in December. The central bank also raised reserve requirements for banks at its first three policy meetings this year.

Consumer prices will probably rise 0.4 percent in April from the previous month, slower than a monthly increase of 0.6 percent in March, Sergei Voloboev, a London-based emerging- markets economist at Credit Suiss Group AG, said in an e-mail yesterday.

The inflation rate fell from a 15-month high of 9.6 percent in January to 9.5 percent in February and March as the ruble rose about 11 percent against the dollar this year.

To contact the reporter on this story: Scott Rose in Moscow at rrose10@bloomberg.net

To contact the editor responsible for this story: Balazs Penz at bpenz@bloomberg.net

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