Russia central bank set for 100 bps key rate hike on Friday

© Reuters. FILE PHOTO: A Russian state flag flies over the Central Bank headquarters in Moscow, Russia March 29, 2021. A sign reads: "Bank of Russia". REUTERS/Maxim Shemetov

By Elena Fabrichnaya and Alexander Marrow

MOSCOW (Reuters) - Russia's high inflation in June prompted a wide-scale revision in analysts' forecasts, shifting market expectations towards a 100 basis-point interest rate hike on Friday, a Reuters poll suggested on Monday.

Annual consumer inflation, the central bank's main area of responsibility, overshot expectations and accelerated to 6.5% in June, reaching its highest since August 2016 when the key rate was at 10.5%, data showed earlier this month.

Sixteen of the 26 analysts and economists polled said the central bank would raise the key rate to 6.50% from 5.50% at the July 23 meeting.

In late June, a Reuters poll of 15 analysts forecast a 50-basis-point hike on July 23.

"We expect a large 100bp 'one and done' rate hike this week," said Vladimir Osakovskiy, Russia and CIS economist at Merrill Lynch, in a note.

"The likely inflation slowdown in 3Q21 should help stop the tightening cycle at 6.5% and may launch a discussion about the timing and scale of a future easing cycle."

ITI Capital said it expected a more decisive increase in the benchmark rate to 6.5%, accompanied by hawkish rhetoric from the bank.

The central bank targets annual consumer inflation of 4%. It climbed above the target in late 2020 amid higher inflation globally and a weak rouble. The central bank now expects inflation to return to its target in the second half of 2022.

The central bank, which slashed the rate to a record low of 4.25% in 2020 to prop up the economy amid the COVID-19 pandemic and a drop in oil prices, had forecast an average rate range of 5.0%-5.8% this year, a forecast Governor Elvira Nabiullina said would be raised in July.

Rate increases became more necessary recently when the rouble took a hit from a new wave of sanctions, inflationary expectations among people in Russia surged and the pace of economic growth exceeded expectations.

Six experts in the poll predicted a 75-basis-point hike to 6.25%, while four predicted a move to 6.0%.

"There is no need for the extreme step of 100 basis points," said VTB Capital analyst Alexander Isakov. "Fifty basis points likely reflects the scale of risks and leaves room for manoeuvre in the coming quarters if necessary."