In an unscheduled meeting of policymakers, Russia's central bank sharply cut its key rate to 17% and said it maintains the prospect of further cuts at upcoming meetings.

The Russian rouble rallied to its strongest level since June 2020 against the euro after the surprise move, while stock indexes were mixed after the U.S. Congress voted to ban Russian oil.

Last month, the central bank kept its key interest rate at 20% following a massive emergency hike in February and said it would start buying Federal Loan Obligation (OFZ) government bonds, warning of an imminent spike in inflation and a looming economic contraction.

Russia sent troops into Ukraine on Feb. 24 on what it calls a "special military operation" to demilitarize and "denazify" its neighbor, prompting widespread Western sanctions.

On Friday, the central bank unexpectedly cut the key rate by 300 basis points, deciding ahead of its next regular meeting set for April 19.

Ruble rallies

The ruble quickly returned to gains after easing slightly following the move. By 11:16 a.m. GMT, the ruble gained 1.8% to 74.42 against the U.S. dollar, inching closer to its strongest level since Feb. 11 of 74.26 hit on Thursday.

Against the euro, the ruble rallied by nearly 3% to 79.10 after briefly touching the 79 mark for the first time since late June 2020.

Yields on 10-year OFZ treasury bonds, which move inversely to their prices, fell to 10.93% from 11.62% seen before the rate move.

The central bank said the move reflected a change in the balance of risks of accelerated consumer price growth, a decline in economic activity and had contained the risk to financial stability, adding that it "holds open the prospect of a further key rate reduction at its upcoming meetings."

"Financial stability risks are still present but have ceased to increase for the time being, including the adopted capital control measures. There is a steady inflow of funds to fixed-term deposits," its statement said.

The annual inflation in Russia accelerated to 16.70% as of April 1, its highest since March 2015 and up from 15.66% a week earlier, as the volatile ruble sent prices soaring amid unprecedented Western sanctions, which cut Russia off the global financial markets and limited its trade with the outside world.

The surprise rate decision followed comments from Finance Minister Anton Siluanov, who said this week his ministry was working with the central bank on measures to make the ruble exchange rate more predictable and less volatile.

"If the experience of the 2014-15 ruble crisis is any guide, a large interest rate cut (like that seen today) is likely to be followed by much more gradual easing as the CBR targets a large positive real interest rate to bring inflation back down to its target," Capital Economics said in a note.

External conditions for the Russian economy remained challenging and were "considerably constraining economic activity," the central bank said, but added that it "holds open the prospect of a further key rate reduction at its upcoming meetings".

The central bank added that inflation would continue to rise due to the base effect, yet the latest weekly data showed a slowdown in the price growth rate, thanks to the rouble's growth.

"The tightening of monetary conditions already in place is partly offset by the lending support program launched by the government and the Bank of Russia, but it will continue to limit pro-inflationary risks," the statement said.

Russian analysts welcomed the ahead-of-schedule key rate cut, which some expected to start only in June, saying it showed that the central bank was confident in the emergency steps taken since Feb. 24.

"The rate is likely to be cut by another 100-200 bps in April, yet it will require additional positive dynamics on inflation and inflationary expectations," Dmitry Polevoy, head of investment at the Moscow-based brokerage Locko-Invest, said.

After Friday's decision, Polevoy improved his year-end key rate forecast to 11-12% from an earlier expected "no higher than 15%."

Volatility

Moves in the ruble remain jittery and trading volumes on the Moscow Exchange are below average, but the currency had fully recovered to levels seen before Russian troops entered Ukraine.

The ruble is supported by Russia's strong current account surplus amid high commodity prices as well as Russia's capital controls, said Olga Belenkaya, head of macro research at Finam brokerage.

The currency has recently been steered by mandatory conversion of the dollar and euro revenues by export-focused companies, while demand for foreign exchange is limited by a ban on buying cash dollars and euros and a 12% commission on buying foreign exchange online or through a bank.

Given the latest ruble firming, some recovery in demand for foreign exchange is possible even despite the commission, Otkritie bank said in a note.

The ruble will lean toward firming without action from the central bank and could enter the 70-75 range to the dollar during the day, Promsvyazbank analysts said in a note.

The dollar-denominated RTS index rose 0.7% to 1,099.5 points on the stock market. The ruble-based MOEX Russian index fell 1.4% to 2,598.0 points.

Shares in oil firm Bashneft underperformed the market, losing 4% on the day, while shares in its rival Lukoil were down 1.4%.

Oil stocks took a hit after the U.S. Congress voted to impose further economic pain on Russia over its actions in Ukraine, passing one measure to remove its "most favored nation" trade status and another to ban oil imports