Russia's central bank raised its key interest rate to 7.5% on Friday, its 6th increase this year in a bid to contain the highest inflation since early 2016, and indicated that more rate hikes were still possible.

The decision to increase the rate by 75 bps sparked a rally in the rouble, surprising the market, which had on average expected the central bank to chose 50 bps after increasing rates by 25 bps in September.

"If the situation advances in accordance with the baseline forecast, the Bank of Russia holds open the possibility of further key rate increases at its upcoming meetings," the central bank said in a statement.

The rouble surpassed 70 against the dollar for the first time since June 2020, departing from levels around 70.50 seen shortly before the rate hike.

The central bank also adjusted its estimates and now expects inflation to reach 7.4-7.9% in 2021, above its previous call for a 5.7-6.2% rise in consumer prices this year.

The central bank, which targets 4% inflation, reported that inflation was 7.8% as of Oct. 18, but that it was on track to return to 4.0-4.5% in 2022.

High inflation impacts living standards and has been one of the primary worries among households, pushing authorities to offer social assistance payments, which can further fuel inflation.

Higher rates help control consumer inflation by increasing lending costs and increasing the attractiveness of bank savings.

Higher rates are also favourable of the rouble, while expectations that the rate-hiking cycle is nearing its peak and will reverse at some point may stimulate foreign funds inflows into Russian treasury bonds.