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Russia Hikes Key Rate By 50 Bps As Expected

Russia's central bank raised its key interest rate citing faster economic recovery and rising inflation.

The Board of Directors decided to increase the key rate to 5.50 percent from 5.00 percent, the Bank of Russia said in a statement on Friday.

This was the third consecutive hike in rates. The bank had earlier lifted the benchmark rate by 50 basis points in April and 25 basis points in March.

The bank suggested that increased inflationary pressure together with recovery from the pandemic could lead to a more significant and prolonged upward deviation in inflation from the target. This creates the need for a further rate hike at the next meetings, the bank said.

With inflation set to remain stuck firmly above target for a while, another 50-75 basis points of interest rate hikes in the second half of this year look increasingly likely, Liam Peach, an economist at Capital Economics, said.

Inflation is forecast to return to the Bank of Russia's target in the second half of 2022 and to remain close to 4 percent thereafter.

Further, policymakers noted that economic activity is recovering faster than the central bank expected. The economy is expected to return to the pre-crisis level in the second quarter of 2021.

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