The ruble tumbled the most since 2011 after a larger-than-forecast increase of Russia’s key interest rate failed to ease concern that the economy will remain hobbled by sanctions and capital flight.

The Bank of Russia raised its key rate to 9.5 percent percent from 8 percent, according to a website statement. That surprised all 31 economists surveyed by Bloomberg.

Governor Elvira Nabiullina is resorting to higher borrowing costs to halt a currency run even after three earlier increases failed to assuage investors concerned about President Vladimir Putin’s stance on Ukraine. Policy makers said today that tighter monetary conditions haven’t offset the impact of a weaker ruble and trade restrictions imposed in August amid lower oil prices, inflation at a three-year high and sanctions levied by the U.S. and its allies over the conflict in Ukraine.

“A very harsh decision -- this hurts,” Ivan Guminov, money manager at Ronin Trust in Moscow, said by by e-mail. “What I’d like to understand is how the banks are going to manage this cost of funding?”

The Russian currency tumbled after the central bank, which plans to move to a free float regime from 2015, made no announcement on shifting its currency-intervention policy.

The ruble, which temporarily pared declines after the decision, surged yesterday on optimism Russia will take steps to stabilize the currency and deter speculators. It weakened 3.3 percent today to 43.0235 per dollar at 10:25 p.m. in Moscow, the biggest daily drop since August 2011.

Test Looming?

“Defending the ruble with rates would be challenging, given the high level of rates, low growth and a weak financial system outside the core banks,” Clemens Grafe and Andrew Matheny, analysts at Goldman Sachs Group Inc., said in a note to clients. “The market is likely to test if the central bank is sticking to its ruble intervention policy in the coming days.”

Borrowers are cut off from some foreign capital markets after the U.S. and the European Union zeroed in on individuals and companies to punish Russia for the annexation of Crimea and Putin’s alleged support for the separatist insurgency in eastern Ukraine.

Emergency Move

When the crisis in Ukraine flared in March, the central bank responded by raising its main rate by 1.5 percentage point, the most since 1998. That was matched by today’s move, which brought the benchmark to the highest level since it was introduced 13 months ago

Policy makers have remained focused on high inflation expectations and the largest capital outflows since 2008. They conceded today that economic growth will be “close to zero” this quarter and the following three months and estimated expansion at 0.2 percent from a year earlier in the July to September period.

The Bank of Russia will be ready to start monetary easing if “external conditions improve and inflation and inflation expectation show a stable downward trend,” according to its statement today.

No Impact

“For the ruble, the effect is not super positive, since the rhetoric turned softer: instead of a sentence on ‘possible tightening of monetary policy’ they now have a sentence on possible easing,” said Yury Tulinov, an analyst at OAO Rosbank. “Perhaps that’s the reason why there’s no market impact from this 150 basis-point hike.”

The central bank juggled faster inflation and sluggish economic growth before the ruble moved to the forefront of policy concerns. The regulator intervened on the currency market in October for the first time since May, selling almost $27 billion, central bank data show.

The currency defense has sapped international reserves, bringing the stockpile to $439.1 billion, near the lowest level in four years. Capital outflows reached $85.2 billion in the first nine months of the year, the highest since 2008, when the exodus reached $133.6 billion.

Russia won’t “mindlessly burn up” reserves to defend its currency, Putin said Oct. 24. The U.S., Ukraine and the EU accuse Russia of sending cash, arms and fighters to aid separatist rebels in Ukraine.

‘Significant Changes’

“Significant changes in external conditions have taken place: a considerable fall in oil prices and stricter sanctions imposed by certain countries,” the central bank said in the statement. “As a result the ruble depreciated -- that together with restrictions on the import of certain food items imposed in August resulted in further acceleration in consumer-price growth.”

A weaker ruble boosts prices of imports, feeding the inflation rate that was already on the rise after Putin retaliated in August against U.S. and European sanctions by restricting a range of food imports. The currency’s devaluation will add 1.3 percentage point to price growth to the end of 2014, with another 1.2 percentage point contributed by August’s trade restrictions, the Bank of Russia estimates.

That won’t sit well with a majority of Russians, for whom inflation is the top concern, according to a July poll published by the state-run VTsIOM research center. Price growth accelerated to 8 percent from a year earlier in September, the fastest in three years and double the regulator’s medium-term target.

Inflation Spike

Inflation was at 8.4 percent as of Oct. 27, the central bank said today. Twenty-two analysts in a Bloomberg survey predicted the central bank will raise its key rate to 8.5 percent and two forecast a shift to 9 percent. Increases of a quarter-point and 75 basis points were forecast by one each, while five economists saw no change.

“When you do big things like hike rates significantly or intervene, you better be sure they work, or it just makes things worse and risks creating a vicious market reaction,” said Tim Ash, chief economist for emerging markets at Standard Bank Group Ltd. in London, said by e-mail. “So the Russian central bank better be prepared to back this up with further action if this does not work.”