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    Russia's central bank raises key rates to fight inflation

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    Russia's central bank will raise its key interest rates by 0.25 percentage points from May 3 to reign in inflation, the regulator said on Friday, in what analysts said was a signal from the bank that it was ready to sacrifice investment growth for the sake of lower prices.

    By Ksenia Nekhorosheva

    Russia's central bank will raise its key interest rates by 0.25 percentage points from May 3 to reign in inflation, the regulator said on Friday and analysts said the bank signalled it was ready to sacrifice investment growth for the sake of lower prices.

    The refinancing rate, the central bank's credit rate benchmark, will rise to 8.25 percent, while the deposit rate will increase to 3.25 percent. At the previous board meeting at the end of March, the central bank left the refinancing rate and rates of its other operations unchanged, but increased reserve requirements by 0.5-1 percentage points.

    "The decision was taken due to persisting high level of inflationary expectations which exceed inflation targets for this year and given the ambiguous influence of global financial and commodities markets on the Russian economy," the central bank said in statement.

    The consumer price growth continued slowing down month-on-month, showing that internal agricultural price shock coupled with international food price growth is gradually exhausting. Monetary factors continue contributing a lot to inflationary pressure on the economy, the central bank added.

    Analysts said the rate hike was surprising as monetary authorities had not expressed any concern about high inflationary expectations in their recent statements. On Thursday, central bank Deputy Chairman Sergei Shvetsov said the regulator was happy that analysts had cut their inflation forecasts to 7 percent.

    Leonid Ignatyev, an analyst from Trust bank, said the central bank was tightening its crediting policy while investment activity was dwindling.

    "We do not see reasons for increasing the refinancing rate, which is a credit rate," Ignatiev said. "The economic situation is not good enough to be afraid of overheating and tighten the credit policy."

    But Russia faces parliamentary elections in December and presidential polls in March which makes the issue of price rises sensitive. A shortage of gasoline which has set in in some regions since the weekend and pushed prices up, also adds to inflation.

    Alexei Moiseev from VTB Capital told RIA Novosti news agency that surplus oil revenues driven by rising energy prices and a 1.2 trillion rouble liquidity injection at the end of 2010 were the two main monetary factors which speeded up inflation in the country.

    "Surplus liquidity in the banking system was driven, essentially, by a soft budget policy...And we cannot cope with it even now. Moreover, (budget) expenses increased considerably. Expenses were supposed to be financed by non-emission instruments... but they were financed by highly inflationary petrodollars," Moiseev said.

    The regulator said it would proceed from the balance between high inflationary pressure, lower economic growth and foreign economic market dynamics when deciding on its further steps to change the monetary policy.

    Raiffeisenbank said the central bank was not likely to increase rates soon.

    "We maintain our forecast that the central bank's current rate increase was the last one in the first half of the year. Inflation will start slowing down on the annualized basis from May, and the Bank of Russia will lose the last reason for tightening its monetary policy," Raiffeisenbank said in a statement.

    MOSCOW, April 29 (RIA Novosti)

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