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. Last Updated: 07/27/2016

Interest Rates Hiked 3rd Time This Year

The Central Bank raised its short-term interest rates by a half-point Friday, taking advantage of tightening global monetary conditions to try and curb inflationary money supply growth.

The hike, the third this year, is part of a Central Bank push to tackle annual inflation running at nearly 10 percent by soaking up some of the liquidity created by its dollar-buying currency market intervention.

The bank said in a statement that it would increase its tomorrow-next, spot-next and call deposit rates to 2 percent and its one-week rate to 2.5 percent, effective Aug. 7.

"Today's hike is part of the process of evening out credit and deposit rates in order to increase the efficiency of our monetary policy," said Central Bank deputy head Konstantin Korishchenko.

That comment suggested that deposit rates had scope to close the gap with the bank's one-day repo rate of just over 6 percent. The repo rate is the bank's main credit rate.

Korishchenko confirmed the rate decision was influenced by global monetary tightening. The European Central Bank and Bank of England both raised rates last week, while the United States and Japan are also turning the interest rate screw.

"We are not inclined to dramatize the situation and think markets will be calm. We see a critical level at 3.5 percent to 4.0 percent," said Nikolai Podguzov, a fixed-income analyst at Trust Bank.

"The Central Bank is trying to show it can influence liquidity through short-term interest rates," he said, adding that previous hikes had "scared" the market but had had little practical impact.

Overnight deposit rates popped higher on the interbank market but eased back to 2 percent to 3 percent, meaning real short-term rates remain deeply negative. The ruble rose 0.2 percent against the dollar/euro basket. Against the weak dollar, the ruble closed up 0.3 percent on the MICEX exchange at 26.6825, its highest since late 1999.

Analysts say that as long as Russia's main monetary policy tool remains the exchange rate, the Central Bank can only raise rates in step with the world's major central banks, now all in tightening mode.

M2 growth accelerated in the 12 months to July 1, to 43.9 percent. The Central Bank's reserves of gold and foreign exchange -- the largest of any country outside Asia -- have soared 53 percent this year, to a record $266 billion.

"This is the Central Bank's answer to signs of rising inflation," said Stanislav Ponomarenko, economist at Raiffeisen Bank, referring to expectations that retail prices may rise by 0.5 percent, to 0.6 percent in July.

"There are plenty of reasons for prices to rise -- gasoline prices, shortages of alcohol," Ponomarenko said. "But the main reason is money supply growth. To limit this growth, the Central Bank is raising interest rates."

The Central Bank has allowed the ruble to rise by 4 percent against the dollar/euro basket this year, attracting new financial inflows made easier by Russia's abolition of capital controls starting July 1.