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Russian central bank flags rising inflation risks after keeping rates on hold

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MOSCOW (Reuters) -Russia’s central bank said the likelihood of an interest rate hike at future policy meetings had grown as inflationary pressures intensify, despite it leaving its key rate at 7.5% as expected on Friday.

Annual inflation, which spiked to over 20-year highs in 2022, has slowed to below the bank’s 4% target in recent months as last year’s base effect took hold. But it is expected to pick up, with consumer prices rising 0.21% in the week to June 5.

The bank’s next rate-setting meeting is scheduled for July 21.

Friday’s decision to hold the rate at current levels was in line with a Reuters poll and analysts had said that Wednesday’s inflation data could lead the bank to issue a tighter signal.

“The option of hiking the rate was considered, but by consensus we decided to hold the rate, but tighten the signal,” Governor Elvira Nabiullina said at a media conference.

“The likelihood of a rate hike has increased.”

The Bank of Russia forecasts year-end inflation at 4.5-6.5% in 2023, returning to the 4% target in 2024.

In a statement, the bank said it was holding open the prospect of increasing the key rate at its next meetings to stabilise inflation close to 4% in 2024 and further on.

In a series of rate cuts last year, the bank gradually reversed an emergency hike that took the rate to 20% in late February 2022. That jump followed Russia’s launch of what it calls its “special military operation” in Ukraine, and the imposition of wide-ranging Western sanctions in response.

The central bank has now held rates steady at 7.5% for six meetings in a row since the last cut in September.

INFLATION PRESSURE

The bank has maintained a hawkish stance this year, unable to find room to ease monetary policy. On Friday it said the overall balance of inflation risks has “tilted even more to the upside”.

“Accelerating fiscal spending, deteriorating terms of foreign trade and the situation in the labour market remain pro-inflationary risk drivers,” the bank said.

The central bank had turned its hawkish rhetoric up a notch, said Liam Peach, Senior Emerging Markets Economist at Capital Economics, describing the bank’s signal as “the strongest signal yet that policy tightening is in the pipeline”.

Inflation risks such as a weakening rouble, rapid wage growth and a recovery in consumer demand have picked up since the last meeting in late April, said Mikhail Vasilyev, chief analyst at Sovcombank.

Russia’s budget spending is well above plan this year, pushing the deficit to $42 billion for January-May, data showed this week. Further budget deficit expansion could require tighter monetary policy, the bank said.

(Reporting by Reuters; Writing by Alexander Marrow; Editing by Andrew Osborn, Mark Trevelyan, Nick Macfie and Hugh Lawson)

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