* Central bank holds key rates, cites above-target inflation
* High inflation expectations a concern - central bank head
* One-week repo rate to become main policy rate
By Jason Bush and Lidia Kelly
MOSCOW, Sept 13 Russia's central bank resisted
pressure to cut policy rates to boost the sluggish economy on
Friday and overhauled its monetary policy toolkit, emphasing its
role in fighting inflation.
New central bank head Elvira Nabiullina told a briefing that
policy rates had been left on hold because inflation remains
above the bank's target - and played down expectations of rate
cuts next month as well.
"Considering current trends - if they remain unchanged -
then the likelihood of keeping rates on hold is high," said
Nabiullina, who has proved less inclined to prioritise growth
over inflation than many had expected.
Nabiullina is a former aide to President Vladimir Putin,
whose decision this week to freeze all regulated utility prices
next year was seen as giving the central bank more scope to lift
economic growth from its slowest in four years, below 2 percent.
Before the decision, analysts had been almost evenly split
over whether the bank would cut rates this month or leave them
on hold, with most expecting cuts either today or next month.
But Nabiullina, who took the helm at the central bank in
June, said that for the time being she was most concerned about
inflation expectations among households and businesses.
The Bank of Russia left its main policy rate, the one-day
auction repo rate, unchanged at 5.5 percent, but changed rates
on some other operations to bring them closer.
"Inflationary expectations are stable and are not
increasing, but they remain for now at a high level. Our task is
to lower inflationary expectations," Nabiullina said.
Showing more openness than her predecessor Sergei Ignatyev,
Nabiullina held a briefing flanked by her new first deputy
Ksenia Yudayeva, who organised Russia's G20 summit, and Sergei
Shvetsov, who heads the central bank's new markets regulator.
A few years ago, the date of the central bank's meetings was
kept secret and it would issue a statement only if it changed
The rouble strengthened slightly after the central bank's
"A reduction in rates is hardly likely until the end of the
year," said Natalia Orlova, economist at Alfa Bank. "The central
bank will wait for the moment when inflation has fallen to 6
Inflation, at 6.3 percent as of Sept. 9, was still above the
5-6 percent official target, but the central bank's statement
highlighted muted demand, an output gap and a good harvest as
exerting downward pressures.
In an updated three-year monetary policy strategy also
published on Friday, the central bank reiterated that lowering
inflation was its central policy goal.
Instead of bending to pressure to cut rates, the bank
focused on strengthening the influence of its policy rates over
market borrowing costs.
Nabiullina described the steps as "important but planned" as
part of a long-term shift towards formal inflation targeting.
The central bank said it was making its one-week auction
repo rate, presently 5.5 percent, its main policy rate from
Previously the one-day repo rate, also currently at 5.5
percent, was seen as the bank's de facto key policy rate,
although the rates on a range of central bank operations were
also treated as policy rates.
Economists welcomed the development as a step towards
credible inflation targeting, in which the central bank relies
mainly on interest rates rather than the rouble's exchange rate
to manage the economy.
"The main thing they're trying to do is to tie market rates
to policy rates. So far the link is very weak," said Clemens
Grafe, chief Russia economist at Goldman Sachs.
"Ultimately it's not the policy rate that affects the
economy, it's the market rate. And if the market rate is not
linked to the policy rate, it's not really clear what you do
when you move the policy rate."
New auctions for three-month funds should also reinforce
this push. The minimum spread over the main policy rate on the
auction of floating-rate funds will be 25 basis points.
The central bank left other rates on hold, with the
overnight deposit rate at 4.5 percent and the fixed one-day repo
rate at 6.5 percent.
It cut its overnight rate for loans against non-marketable
collateral, now divorced from the refinancing rate, to 6.5
percent from 8.25 percent. It raised its one-week deposit rate
to 5.5 percent, in line with the one-week auction repo rate.