Russian Inflation at Five-Year Peak Boosts Chances for Rate Hike

Russian inflation hit a five-year high in August, fueling expectations that the central bank will opt for a bigger hike in its key rate Friday.

Annual inflation reached 6.7% in August, the Federal Statistics Service reported late Wednesday, with the closely watched core rate that excludes volatile components like fuel and produce, running even higher at 7.1%. The figures undermined hopes that price pressures were beginning to ease and added to fears that inflation expectations — a major concern for the Bank of Russia — will continue to rise.

“We treat such a trend as an argument for the rate hike by 50 basis points,” said Luiz Saenz, head of international distribution at Sinara in London.

Even before the release, investors’ fears about a bigger hike Friday sapped demand at Wednesday’s weekly government-bond auction.

Facing parliamentary elections next week, the Kremlin has added to fears of further price pressures with nearly 700 billion rubles ($9.6 billion) in new social spending. Officials say the largesse won’t fuel inflation this year but economists aren’t so sure.