Russia's central bank on Friday raised its benchmark interest rate half a percentage point to 7.5% to cope with rising inflation in another sign of widening economic fallout from the Ukraine crisis.
The increase follows a March 3 hike from 5.5% to 7% that bank had described as temporary.
The Bank of Russia's latest move came hours after Standard & Poor's cut Russia's credit rating to one notch above junk levels, citing the political tensions over Ukraine and the flight of investor capital.
"In our view, the tense geopolitical situation between Russia and Ukraine could see additional significant outflows of both foreign and domestic capital from the Russian economy and hence further undermine already weakening growth prospects," S&P said.
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The Bank of Russia said that raising its key rate would slow inflation to no more than 6% by the end of the year. Consumer prices were up 7.2% in April from a year ago, the bank said, and it projected inflation would remain at that level until mid-year.
For comparison,annual inflation in the U.S. and in the 18 nations that use the euro is running well below 2%.
"The probability of inflation exceeding the 5.0% target at the end of 2014 has increased substantially," the Bank of Russia said.
The actions by S&P and the Bank of Russia follow a slowing of economic growth in Russia to 0.8% in the first quarter and capital flight of $70 billion by anxious investors. Russian officials have said more capital was taken out of the country in the first quarter of the year than in all of 2013.
Russia was facing deepening economic woes even before its actions in Ukraine. Its economy grew 1.3% in 2013, the lowest rate since 1999, excluding 2009 when the economy contracted amid the global financial crisis. S&P said its base forecast was for average annual growth of 2.3% a year in 2014 through 2017, but indicated that could prove too optimistic.
"In our view, if geopolitical tensions do not subside in 2014, there is significant downside risk that growth will fall well below 1%," S&P said.
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Originally Posted by Seraphim
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