February 6, 2013 / 12:55 PM / 5 years ago

UPDATE 2-Russian central bank defends hawkish stance

* Monetary and economic conditions balanced - Ulyukayev

* Output gap has closed, new cbank report shows

* Expects inflation to fall within 5-6 pct target by Q2

* C.bank may cut largely symbolic refinancing rate (Adds context on output gap analysis, quotes)

By Jason Bush

MOSCOW, Feb 6 (Reuters) - Russia's central bank stepped up its defence of its reluctance to ease policy, offering more insight on Wednesday into the methods it uses to set interest rates and describing its current stance as neutral.

Under political pressure to cut rates in response to slowing growth and tightening credit, the central bank said financial conditions are "neutral" and Russia's growth rate is in line with potential.

"The monetary gap - it is neutral," First Deputy Chairman Alexei Ulyukayev told reporters on Wednesday.

"We don't see a significant gap between potential growth and actual growth. In this sense we consider monetary policy as neutral considering the risks."

He also said inflation could fall within the central bank's target range of 5-6 percent in the second quarter of this year, notwithstanding a spike in January to 7.1 percent.

Ulyukayev, a leading contender to replace outgoing Chairman Sergei Ignatyev in June, emphasised the central bank's independent thinking at a presentation of its first quarterly monetary policy report.

The Bank of Russia is making greater efforts to communicate its rationale for keeping key interest rates on hold since last September. Government leaders have called for monetary easing to revive flagging growth.

The bank is seeking to complete a shift towards western-style inflation targeting, away from a focus on the exchange rate and instead prioritising steering inflation expectations and fine-tuning interest rates.

As it tries to make monetary policy more predictable and systematic, the bank has for the first time published two of the key indicators - often referenced by Western central banks - it uses to make its rate call each month.

"In this text we show the 'cooking' of how we take decisions," Ulyukayev said, highlighting sections of the report that measure the monetary and output gaps.

The central bank uses an Index of Financial Conditions that is designed to show how far conditions in the financial sector are impeding or encouraging economic growth.

This measure - a composite indicator combining factors such as interest rates, money supply trends, the level of the exchange rate and the stock market - was just below zero as of last November, with a positive trend since mid-2012.

The bank interprets this as contradicting recent comments by officials, bankers and businessmen that the central bank's interest rate policies are contributing to a marked economic slowdown.

The bank also looks at the output gap, the difference between current economic output and the potential level. It says this gap has shrunk from more than 6 percent of GDP in 2009 to zero at the end of last year - implying that easing monetary conditions right now would stoke inflation, and not growth.


Hinting at a possible compromise, Ulyukayev said the central bank would discuss bringing its 8.25 percent refinancing rate, which is largely symbolic, closer into line with its main policy rates.

"Such a prospect exists - not only for macroeconomic reasons. The refinancing rate, as you know, isn't a key policy rate but is more of a historical one," he said.

The central bank, which next reviews policy on Feb. 12, is expected by economists to keep its main lending rate - its 5.5 percent minimum one-day repo rate - on hold.

The central bank has continued to sound hawkish on inflation, but the growth versus inflation dilemma could become less pressing in the next few months, Ulyukayev suggested.

He said that inflation was close to its peak and would enter a downtrend in March, falling within the central bank's 5-6 percent target range in the second quarter. That view diverges from the central bank's own forecast that it will hit target only in the second half of 2013.

"We have the possibility in the second quarter of returning to target, considering the growth of the monetary base and the money supply," Ulyukayev said, referring to 10 percent and 12 percent growth respectively.

A recent strengthening of the rouble, a levelling off of global food prices and a statistical base effect also pointed to moderating inflation trends, he added.

Ulyukayev said policy makers would propose widening their inflation target to 2 percentage points from the current one-point range, saying: "It would be more correct and realistic." (Editing by Douglas Busvine/Ruth Pitchford)

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