By Vladimir Soldatkin and Alexander Marrow
MOSCOW (Reuters) - Russia's central bank raised its key interest rate by 100 basis points to 16% on Friday, hiking borrowing costs for the fifth consecutive meeting in response to stubborn inflation, and suggested that its tightening cycle was now close to completion.
The bank has raised rates by 850 basis points since July, including an emergency hike in August after the Kremlin called for tighter monetary policy when the rouble tumbled past 100 to the dollar. It has since recovered to just over 90.
The bank said pro-inflationary risks over the medium-term horizon remained substantial and warned that stabilising inflation near its 4% target would require high rates for a long time. Higher-than-expected government spending would also raise inflation risks, it said.
Friday's decision was in line with a Reuters poll of analysts.
Governor Elvira Nabiullina said the 100-basis-point hike and a rate hold were the only options substantially considered, but there were "isolated proposals" for a sharper increase.
"Based on our baseline scenario ... we are close to the end of the rate hike cycle, but in many ways everything will depend on the situation," Nabiullina said.
The central bank's tightening cycle began this summer when inflationary pressure from a tight labour market, strong consumer demand and the government's budget deficit was compounded by the falling rouble.
The bank said labour market conditions were the key supply-side constraint on the Russian economy, which it said was still suffering from significant labour shortages, especially in manufacturing.
But economic growth is set to outperform previous forecasts and exceed 3% this year, the bank said, driven by domestic demand propelled by rising lending and wages.
Russia's economic rebound is a welcome boost to President Vladimir Putin as he runs for re-election in March, with numerous economic challenges on his plate. Moscow's success in evading a Western oil price cap makes those challenges far more surmountable.
Sanctions and a global economic slowdown are the main external risks, as is Russia's lingering dependence on oil and gas revenues, Nabiullina said.
END OF TIGHTENING CYCLE?
Analysts were divided on the bank's future moves.
"We still think more tightening is to come as inflation pressures build further," said Liam Peach, senior emerging markets economist at Capital Economics, who said he expected another hike to 17% next year.
JP Morgan's Anatoliy Shal said this was likely the last step in the tightening cycle, with current policy already sufficiently, if not overly, restrictive, and he expected rates to be cut to around 10% by end-2024.
Russia had gradually reversed an emergency hike to 20% which it made in February 2022 after Moscow sent its troops into Ukraine, prompting sweeping Western sanctions. It cut rates to as low as 7.5% earlier this year.
Putin on Thursday said annual inflation could approach 8% this year, well above the central bank's 4% target. He even issued a rare apology when a pensioner complained to him about the price of eggs.
The central bank reiterated its expectation that inflation would end the year at the upper end of its 7-7.5% forecast range.
"Inflation expectations have remained high for many years in a row," Nabiullina said. "This really worries us."
Next year, the bank expects year-end inflation at 4-4.5%, although Nabiullina admitted that the risk of inflation being higher was far greater than it falling below target.
The first rate-setting meeting of next year is scheduled for Feb. 16, when the bank will update its forecasts.