* Central bank keeps key lending rate at 7 pct
* Move indicates monetary tightening more permanent
* Bank says to prioritise financial stability
By Lidia Kelly
MOSCOW, March 14 Russia's central bank on Friday
kept lending rates on hold after raising them two weeks ago and
said it would fight for financial stability after the standoff
with the West over Crimea, which has sent the rouble and stocks
The bank took the emergency step on March 3 of raising its
key rate by 150 basis points to 7 percent to stem capital flight
after President Vladimir Putin said Russia had the right to
Russian troops have already effectively taken control of
Ukraine's Crimea region, which is expected to vote to become
part of Russia in a referendum on Sunday that the West says is
The Russian central bank said there would be no easing of
rates in the months ahead, suggesting it expects more tough
times ahead for the rouble and for stocks, which have lost about
a quarter of their value since mid-February.
"Stabilising capital flows is clearly the central bank's
number one priority," said Neil Shearing, chief emerging markets
economist at Capital Economics in London.
"The tightening of the policy may be more permanent than
many seemed to expect. My sense is that unless capital flight
eases, a further rate hike is possible."
Analysts widely expect capital flight to reach $50-$55
billion in the first quarter alone, compared with $63 billion in
the whole of 2013.
The East-West standoff over Ukraine and the Crimea
referendum have hit Russian assets hard.
The central bank has been forced to put on hold a
long-promised shift towards inflation targeting, and this risks
tipping the economy into recession as it tries to ensure
financial market stability.
"The Bank of Russia's priority is to contain the effect of
(the rouble's) exchange rate dynamics on inflation and to
maintain financial stability," the central bank said on Friday.
The rouble is down 11 percent against the dollar this year
, adding pressure on consumer price inflation. The central
bank has spent at least $16 billion this month to keep it from
falling too fast.
Russian stocks have tumbled since Putin's declaration on the
right to invade Ukraine, and the capitalisation of the MICEX
index is down $66 billion since March 3, not including
the 2.0 percent slide in stocks seen on Friday.
Analysts had said they expected the central bank to keep its
rates on hold this time, and many do not see any monetary easing
until at least a presidential election due in Ukraine on May 25.
TOUGH TIMES AHEAD
The full response of the West and markets to the Crimea
referendum is far from certain.
"We believe (the referendum) might lead to a limited
ratcheting-up of sanctions on Russia, but with little direct
economic impact," analysts at Renaissance Capital said in a note
on Friday. "However, plenty of negative headlines and
second-round effects are likely to emerge."
Shearing, at Capital Economics, said nervous anticipation
over the sanctions might be having a bigger effect on markets
than any sanctions themselves would. But, he said, there was
still "no end in sight to the crisis."
Whatever the response, a further slide on Russian markets
and more pressure on the rouble are expected, meaning the
central bank will remain in crisis mode.
"It is clear that keeping rates at current levels over the
long term contributes, first of all, to the (preserving of)
financial stability rather than combating inflation," said
Alexander Morozov, chief economist for Russia at HSBC in Moscow.
Annual inflation stood at 6.2 percent in February. The
central bank's goal has been to bring it down to 5 percent by
year-end. On Friday, it said risks to that target remain.
"Inflation rates are unlikely to fall until mid-2014 due to
the observed rouble depreciation," it said. It did not say how
much the currency's weakening may contribute to inflation or
what the impact will be on economic growth.
Vladimir Miklashevsky, an analyst at Danske Bank in
Copenhagen, called the central bank's decision on Friday a
de-facto tightening of monetary policy.
"These are extremely negative actions for the Russian
economy," he said. "The probability of a recession has grown