Russian price freeze decision boosts rate cut chances
* Putin backs plan to freeze all regulated utility prices
* Move raises pressure for central bank rate cut on Friday
* High inflation and weak rouble argue against rate cuts
By Jason Bush and Oksana Kobzeva
MOSCOW, Sept 12 (Reuters) - A decision by Russian President Vladimir Putin to freeze utility prices in 2014 adds to chances that the central bank will cut key policy rates when it meets to discuss them on Friday.
By a narrow margin, analysts polled by Reuters earlier in the week had expected the central bank to hold rates this month, despite pressure from the Kremlin to boost the flagging economy.
But many say that yesterday's decision to freeze regulated tariffs for utilities such as gas, electricity and railway fares could now tilt the interest rate equation in favour of cuts.
"Now they will probably cut, because it will be difficult to explain delaying with (references to) inflationary expectations," said Alexei Pogorelov, economist at Credit Suisse, who has changed his forecast from "hold" to "cut".
Putin backed the tariff price freeze plan, Economy Minister Alexei Ulyukayev said on Wednesday, following a late-night meeting between the president and ministers.
This follows a directive from Prime Minister Dmitry Medvedev last week which had asked key ministries to consider the move, the first time Russia has frozen all such prices since 1999.
While Russia regulates the cost power, gas, water and transportation, it only provides subsidies in limited cases. That means that a tariff freeze would pressure the bottom line of monopolies and regulated sectors.
QUID PRO QUO
Putin's decision to freeze utility tariffs looks like part of a quid pro quo with the central bank, which government officials have long been urging to loosen monetary policy.
New central bank head Elvira Nabiullina has directly called for the government to curb annual utility price increases. Recently she warned that the central bank may even have to raise interest rates if the government didn't do so.
Analysts at Bank of America Merrill Lynch forecast that the tariff freeze will knock around one percentage point off next year's inflation figure - making it far easier for the central bank to achieve its 4.5 percent inflation target for 2014.
However, forecasters are still divided on the central bank's next move, with many continuing to believe that the central bank will hold key rates on Friday.
"Inflationary pressure is still strong, so we do not think the central bank will reduce key interest rates at its September 13 meeting," analysts at Sberbank CIB said in a note on Thursday.
Inflation was 6.5 percent in September, above the central bank's 5-6 percent target range for the year.
Sberbank CIB analysts said that a further factor likely to stay the central bank's hand was the vulnerability of the rouble. In recent weeks the central bank has been intervening actively on the currency market to stabilise the exchange rate.
VTB economist Daria Isakova said that following the tariff freeze decision, she estimated the chances of a rate cut on Friday at 40 percent, with a 60 percent chance rates would be held.
"In other words we're maintaining our forecast (of a hold), because we think the regulator will be consistent in its statements and inflation above 6 percent doesn't allow it to cut rates," she said. (Additional reporting by Oksana Kobzeva; Editing by Douglas Busvine/Ruth Pitchford)
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