MOSCOW, July 21 Reuters Russia39;s central bank hiked its key interest rate by a greaterthanexpected 100 basis points to 8.5 on Friday, raising the cost of borrowing as the weak rouble added to inflation pressure from a tight labour market and strong consumer demand.

It was the first time the bank had raised rates in more than a year, having gradually reversed an emergency hike to 20 made in February last year after Russia sent its armed forces into Ukraine, which prompted the West to impose sanctions on Moscow. Its last cut, to 7.5, was in September.

Proinflationary risks have increased significantly over the mediumterm horizon, the bank said in a statement. The increase in domestic demand surpasses the capacity to expand production, including due to the limited availability of labour resources.

This was reinforcing persistent inflationary pressure, it said, while the rouble39;s depreciation this year was significantly amplifying proinflationary risks.

The central bank raised its yearend forecast for inflation now just below 4 to 5.06.5 from 4.56.5, and said it was holding open the possibility of further hikes at future meetings.

SURPRISE DECISION

The decision surprised analysts polled by Reuters, who had forecast a 50basispoint hike.

However, some analysts had revised their forecasts in recent days to anticipate an even larger rise as inflation data this week showed a jump in households39; inflationary expectations for July and an acceleration in Russia39;s…