By Alexander Marrow and Elena Fabrichnaya
MOSCOW (Reuters) -The Bank of Russia hiked interest rates by a higher than expected 200 basis points to 15% on Friday, raising borrowing costs for the fourth meeting running in response to a weak rouble, stubborn inflation and budget spending.
The central bank has raised rates by 750 basis points since July, including an unscheduled emergency hike in August as the rouble tumbled past 100 to the dollar and the Kremlin called for tighter monetary policy.
"Current inflationary pressures have significantly increased to a level above the Bank of Russia’s expectations," it said in a statement, pointing to domestic demand outpacing the provision of goods and services, and high lending growth.
Governor Elvira Nabiullina also said the budget was a significant factor in Friday's decision, as Russia increases government spending, pouring cash into the defence sector to ramp up military production and prosecute what it calls its "special military operation" in Ukraine.
"The updated medium-term parameters of fiscal policy assume a slower than expected decline in fiscal stimulus in the years ahead," the bank said.
It also acknowledged for the first time that it may not succeed in returning inflation to its 4% target next year, forecasting year-end inflation for 2024 at 4-4.5%.
The majority of analysts polled by Reuters had expected a hike to 14%. The rouble leapt to a more than six-week high against the dollar after the decision.
FRONT-LOADED TIGHTENING
The central bank's tightening cycle began this summer when inflationary pressure from a tight labour market, strong consumer demand and a budget deficit was compounded by the falling rouble.
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.
The central bank said inflation would range from 7.0-7.5% in 2023. It had previously forecast year-end inflation at 6.0-7.0%. Annual inflation was running at 6.38% as of Oct. 16.
The bank maintained its hawkish stance, stating that tight monetary conditions would be maintained for a long period, but withdrew guidance that it would study the need for further hikes. Nabiullina described the signal as neutral.
But the bank set its 2023 key rate range at 15-15.2%, suggesting rates could climb further and Nabiullina said that may be required. In 2024, the rate is seen at 12.5-14.5%.
"At recent meetings, we raised the key rate by tangible steps and will be ready to do this again if we do not see signs of a sustainable slowdown in inflation and a cooling of inflation expectations," Nabiullina said.
The next rate-setting meeting is scheduled for Dec. 15.
"It looks like today's interest rate hike front-loaded the tightening cycle in response to the fiscal announcements earlier this month," said Liam Peach, senior emerging markets economist at Capital Economics.
(Reporting by Elena Fabrichnaya in Moscow and Alexander Marrow in London; Editing by Gareth Jones, Mark Trevelyan and John Stonestreet)