Russia is raising interest rates for the first time in more than two years

The Russian central bank unexpectedly hiked interest rates for the first time in more than two years on Friday, citing the risks of rising inflation and geopolitical threats.

The move – forecast by only three of 41 analysts polled by Bloomberg – brought the country’s key interest rate from a record low of 4.25 percent to 4.5 percent and opened the door for further increases in the coming months.

Central bank governor Elvira Nabiullina told reporters that Russia was returning to a “neutral” rate of 5-6 percent but warned that “uncertainties” could prevent it from reaching that target by the end of the year.

The ruble rose slightly against the dollar after the decision, with 10-year government bond yields hitting their highest level in a year.

Russia’s relatively rapid economic recovery, after refusing to follow many other countries in rolling out a second coronavirus lockdown last fall, meant inflation rose faster than expected, Nabiullina said.

The central bank expects inflation to peak this month after hitting 5.8 percent earlier this week – its highest level in more than four years. The Russian consumer price index is now forecast by the central bank to return to its 4 percent target by mid-2022, rather than the end of this year.

“The decision was justified by pointing to continued robust inflationary pressures and increased inflation expectations amid green drives of economic recovery,” Ivan Tchakarov, chief economist for Russia and CIS at Citibank, said in a note. “This would indeed be compatible with a quicker return to neutral political stance, which justifies the expectation that further rate hikes will take place in the coming months.”

Brazil and Turkey, two major emerging economies, took similar decisions to Russia earlier this week, raising their main interest rates to contain inflation.

Russia set price caps on several key foods late last year after prices soared, resulting in a protracted decline in living standards that was exacerbated by the pandemic.

The central bank expects gross domestic product to grow between 3 and 4 percent this year, after falling 3.1 percent in 2020.

“The economy is growing faster than expected and this growth is becoming more stable. It does so thanks to the recovery in internal and external demand for consumer goods, as well as exports of metals, chemicals and food, Nabiullina said.

Many Russian sectors have already recovered or exceeded pre-crisis levels, while the hardest hit sector, services, saw “a significant improvement in business,” added Nabiullina, as restaurants, bars and hotels are all lacking in trade in the world a lock.

Russia is ready to react if the US toughens sanctions on Moscow’s national debt in the coming weeks, said Nabiullina.

“If there are sanctions, there can be short-term fluctuations in liquidity, but our national debt is very low by international standards,” she said. “We have all the tools to deal with the volatility in the financial markets.”

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