By Josie Cox and Chiara Albanese

Russian markets showed only a muted reaction to the central bank's decision to raise interest rates for the third time in five months Friday, even though the move was largely unexpected.

Economists and strategists said that geopolitical tensions, rather than monetary policy, were at the forefront of investors' minds and that while the decision--the bank's third since March--may cap the currency's losses in the longer term, a meaningful pickup in the ruble is unlikely.

Directly after the announcement, the currency edged marginally higher against the U.S. dollar, before slipping slightly lower to trade at 35.12 against the greenback. Year-to-date, the ruble has fallen 7% against the dollar, albeit with a large recovery since March.

Oleg Kouzmin, an economist for Russia at Renaissance Capital, said that over a two-month period the decision may influence the ruble, but in the short term the currency is much more driven by geopolitics.

Equity markets, which were already trading comfortably down on the day after European Union diplomats on Thursday said that they are moving to place sanctions on a range of Russian economic sectors, extended those falls before recouping the losses a little. By midmorning, the Micex was down 1.4% while the dollar traded RTS index was trading 1.6% lower on the day.

Tatiana Orlova, an economist at Royal Bank of Scotland Group PLC noted the explicit link between geopolitical tensions and inflationary risks in the central bank's statement.

"Inflation risks have increased due to a combination of factors, including, inter alia, the aggravation of geopolitical tension and its potential impact on the ruble exchange rate dynamics, as well as potential changes in tax and tariff policy," the central bank wrote in a statement.

Ms. Orlova also said that the tone of the statement was hawkish and rules out interest cuts in the next six months.

"The central bank is not concerned about boosting growth, but more about inflation," she said.

Write to Josie Cox at josie.cox@wsj.com and Chiara Albanese at chiara.albanese@wsj.com

(END) Dow Jones Newswires

July 25, 2014 06:54 ET (10:54 GMT)

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