U.S. Markets closed

Russia raises interest rate sharply as rouble slides, inflation climbs

* Central bank raises main lending rate to 9.5 pct from 8 pct

* Large rise reflects concern over falling rouble, inflation

* Rouble down nearly 2 pct after rate move

* Analysts say more steps may be needed

* Bank leaves intervention policy unchanged (Adds details and comment)

By Jason Bush and Alexander Winning

MOSCOW, Oct 31 (Reuters) - Russia's central bank raised its main interest rate much more than expected on Friday, trying to tackle a sliding rouble and climbing inflation as plunging global oil prices and Western sanctions hurt the economy.

However, the bank said that it had not changed its rouble exchange rate intervention policy, confounding speculation that it might use Friday's meeting to announce changes that would have enabled a stronger defence of the rouble.

The 1.5 percentage point increase, which takes the one-week minimum auction repo rate to 9.5 percent, compares with analysts' forecasts of a half-point rise in a Reuters poll this week.

The decision of the central Bank of Russia (CBR) brings the cumulative increase this year to four percentage points, despite the economy's weakness.

"This represents a pretty bold move by the CBR to regain the initiative, having been faced with a collapse of their currency," said Neil Shearing, chief emerging markets economist at Capital Economics. "The question is will it work?"

"I expect the market will keep testing the central bank. A consequence of this will be continued rouble weakness."

In a separate statement, the bank told Reuters it had not changed its exchange rate intervention policy, which involves keeping the currency within a nine-rouble-wide band against a dollar-euro basket. The bank plans to scrap the band at the end of this year when it floats the rouble.

There had been speculation that the bank might use Friday's meeting to scrap the band ahead of schedule, or bring in a more discretionary policy that would enable bigger interventions.

"My concern is that the pressure on the rouble that we saw before this was hardly the result of interest rates being too low," said VTB Capital economist Vladimir Kolychev. "I very much want to believe that this (rate rise) will help the rouble. If not, then the central bank will have to change its exchange rate policy."

The central bank has been under pressure to raise rates to defend the rouble, which has shed around 20 percent against the dollar since mid-year due to falling prices of oil, a major export earner, and the sanctions imposed over Russia's actions in Ukraine.

The move appeared to do little to buttress the Russian currency, even though higher rates should make it more attractive to hold deposits and other instruments in roubles. At 1232 GMT the rouble was down 3.1 percent on the day against the dollar at 42.92, doubling its loss compared with at the time of the rate decision.

The rouble had already been well down on Friday, following a surprise 3 percent rally on Thursday which traders had linked to rumours over an agreement between Russia and Ukraine over Crimea, which Moscow annexed in March.

While no such agreement has materialised, Ukraine, Russia and the European Union signed a deal on Thursday under which Moscow will resume gas supplies to its ex-Soviet neighbour.

Standard Bank analyst Timothy Ash said Friday's rise would probably not be enough. "Market reaction suggests that they will need to do more - which could well push the Russian economy formally into recession," he said in a note to clients.

"Long term it is unlikely to stop the rot, given the underlying drivers for rouble weakness which the rate hike does not help... structural weaknesses in the economy, sanctions, strains in the relationship with the West, and lower oil prices."


HIGH INFLATION

In an earlier statement explaining its rate decision, the central bank said annual inflation in September and October had increased more rapidly than expected, reaching 8.4 percent as of Oct. 27. It expected inflation to remain above 8 percent until the end of the first quarter of 2015.

The bank also cited "significant changes in external conditions" since its last rates meeting on Sept. 12, referring to a "considerable fall in oil prices and stricter sanctions imposed by certain countries against several large Russian companies".

The bank said that higher inflation was the result of the weaker rouble, as well as Russian counter-sanctions which have banned the import of many Western food products. It expected inflation to decline as the economy gradually adjusts to these factors, but this would be slower than previously expected.

"If external conditions improve, and a persistent trend for lowering inflation and inflation expectations emerges, the Bank of Russia will be ready to start to ease its monetary policy," the bank said in its statement.

The bank also said it expected economic growth to be close to zero in the fourth quarter of this year and in the first quarter of next year. However, it said the weak economy was having only a limited downward impact on inflation as slow growth was the result of structural factors.

(Reporting by Alexander Winning, Jason Bush, Elena Fabrichnaya and Oksana Kobzeva; editing by David Stamp)