* Central bank leaves main policy rates on hold
* Cuts rates on long-term liquidity operations by 25 bps
* Sees increased risks of the economy slowing
By Jason Bush
MOSCOW, April 2 Russia's central bank lowered
its interest rates on long-term operations on Tuesday and warned
of "increased risks" to economic growth, making cuts in its key
policy rates more likely in the near future.
The bank's moves suggest it is softening its previously
hawkish position. But they also underscore the dilemma the
central bank faces, when Russia is caught between the twin evils
of excessive inflation and a sharp slowdown in economic growth.
"Policymakers are in a bind," commented Liza Ermolenko, an
emerging markets economist at London consultancy Capital
"On the one hand, the slump in economic growth has
intensified over the past few months ... On the other hand,
inflation remains well above (the central bank's) target range."
The central bank reaffirmed its long-standing concerns about
high inflation by keeping its main policy rates on hold,
resisting mounting pressure to cut them from officials and
It held its one-day auction repo rate at 5.5 percent, the
fixed one-day repo rate at 6.5 percent, the overnight deposit
rate at 4.5 percent and the overnight refinancing rate at 8.25
However, rates for repo, lombard auction and refinancing
operations for three months and longer were cut by 25 basis
These cuts are seen as largely symbolic, as the central bank
mostly provides liquidity to the banking sector through one-day
and one-week repo auctions, at the unchanged 5.5 percent rate.
But they are designed to improve the transmission of monetary
Analysts interpreted the move as a strong signal that the
central bank is likely to cut its main policy rates in the near
"This is a very dovish decision and a signal that the
central bank will soften its position, which increases the risk
of further interest rate cuts," said Vladimir Osakovsky, chief
Russian economist at Bank of America Merrill Lynch.
The rouble fell following the decision, reflecting
expectations of lower interest rates that would reduce demand
for rouble-denominated deposits and bonds.
At 1155 GMT, the rouble was down 0.24 percent on the day at
31.16 against the dollar and down 0.18 percent at
35.13 against a euro-dollar basket.
The central bank is coming under pressure to cut its rates
in order to counter an intensifying economic slowdown.
In another sign that the central bank's position is
softening, it said recent macroeconomic data pointed to
"increased risks of (the) economy slowing down" - a phrase not
seen in its previous statements.
The central bank also said that "economic confidence
indicators are gradually deteriorating", a change from previous
language which said these indicators "remain positive overall".
In February, annual growth in Russia's gross domestic
product was just 0.1 percent, with other macroeconomic data also
pointing to a sharp slowdown.
The shift in the central bank's rhetoric coincides with
growing concerns about the slowdown among senior officials about
the outlook for economic growth.
Speaking at a meeting of government officials on Tuesday,
Prime Minister Dmitry Medvedev said: "This, of course, isn't a
plus. We need to understand what to do so that our economy will
develop according to the scenario that we have defined."
Russia's Deputy Economy Minister recently said that the
ministry will cut its official growth forecast this year from
3.6 percent, with growth below 3 percent likely on current
Despite the mounting concerns over growth, the central bank
also remains worried that inflation, which was 7.2 percent as of
March 25, remains above target - which would lead expectations
of higher inflation to become entrenched.
But the overall balance of the central bank's rhetoric is
becoming clearly more dovish, analysts said, with some
predicting that it may cut its main policy rates at its next
meeting in May.
"Considering the (rate) decision and the statement as whole,
one can suppose that the central bank is more dovishly inclined,
and a reduction of key rates is possible as early as the next
meeting," said HSBC's chief Russia economist Alexander Morozov.