Russia deploys latest big rate hike with no sign tightening over

The Bank of Russia delivered its second 100 basis-point hike in interest rates this year and said monetary tightening may not be over yet as inflation shows little sign of slowing.The central bank’s seventh increase in a row took the key rate to 8.5%, in line with the expectations of the majority of economists in a Bloomberg survey. While the central bank’s statement adjusted its previous phrasing to cite the possibility of a single rate increase in coming meetings - rather than rate increases - policy makers pointed to “high and unanchored” inflationary expectations.  “The contribution of persistent factors to inflation remains considerable on the back of faster growth in demand relative to output expansion capacity,” the central bank said in its statement. “The Bank of Russia holds open the prospect of a further key rate increase at its upcoming meetings.” Inflation is running at double the central bank’s 4% target and expectations for further price growth spiked to a record this month, according to data released this week. Global price pressures have conspired with local factors like a slow harvest to keep price growth high despite a total of 425 basis points in rate increases this year. President Vladimir Putin has called on officials to bring the inflation rate back to the target next year.“It’s a tough statement: they want to get inflation back to 4.0-4.5% at the end of 2022, but at the same time they write that pressure from the labour market has increased,” said Natalia Orlova, chief economist at Alfa-Bank. “So the goal is too ambitious, and pro-inflationary risks are rising.” After Brazil, Russia has been one of the most aggressive among emerging markets in raising interest rates to combat inflation. The latest signs the US Federal Reserve will accelerate tightening could push monetary authorities in developing nations to move faster to prevent their currencies from weakening and further stoking price growth.“Inflation looks set to slow, but the central bank isn’t taking that for granted. The guidance remains hawkish, even though this could be the last hike of the cycle,” says Scott Johnson, Bloomberg Economics.Expectations of higher rates have kept prices on Russian government bonds under pressure, with yields near the highest since late 2018. The rouble has benefited from the central bank’s tight policies - along with rising oil prices - becoming one of the best performers in emerging markets this year despite fears of new sanctions amid tensions over Ukraine.After yesterday’s decision, the rouble edged stronger before paring gains to trade little changed at 73.7825 per dollar yesterday in Moscow. Ten-year bond yields were down two basis points at 8.53%.