Russia central bank hikes deposit rate, hints will pause

By Andrey Ostroukh and Lidia Kelly

May 30, 2011 8:35 AM EDT

Russia's central bank surprised markets by raising its deposit rate on Monday, citing inflation expectations and risks to economic growth, and indicated that current rates will "be acceptable" in coming months.

The hike in the deposit rate, the central bank's main tool for influencing money-market rates and liquidity, follows growing official concern over capital outflows that have exceeded $50 billion in the past seven months.

The Bank of Russia raised the overnight deposit rate by 25 basis points to 3.50 percent. However, it held its key refinancing rate at 8.25 percent and the repo rate at 5.50 percent.

"The decision was made taking into account still-high inflation expectations and risks to steady economic growth," the central bank said in a statement.

"The achieved level of interest rates is seen by the central bank as securing an acceptable balance between risks that inflationary pressure will persist and that economic growth will slow in the coming months," the central bank said.

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April's mixed economic data, which showed higher unemployment, slower industrial output growth and "extremely low" capital investment, indicate that "substantial risks to steady economic growth remain," the central bank said.

Most analysts polled by Reuters had expected the central bank to keep all interest rates unchanged due to the slowing pace of recovery.

"Low deposit rates facilitate capital outflows, which policy makers are not happy about," said Aurelija Augulyte, an analyst at Nordea Bank.

Augulyte and other analysts said that the deposit rate hike signaled the central bank's intent to make interest rates a more effective policy tool by narrowing the gap between its deposit rates and lending rates.

AGAINST EXPECTATIONS

The rouble inched up, firming to 33.40 versus the euro-dollar basket targeted by the central bank from 33.47, but staying in a tight range as players were wary of making new bets while markets in London and New York were closed for holidays.

Non-deliverable forwards (NDFs) for the dollar-rouble rate, which reflects expectations of changes in interest rates and the strength of currencies, climbed higher.

One-month NDF rates rallied to their strongest since early 2010 of 4.06 percent, reflecting expectations of further hikes in central bank rates.

The decision came as a surprise after central bank governor Sergei Ignatyev said last week that it was "in no hurry to raise rates and reserve requirements."

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