April 27, 2018 / 10:47 AM / a month ago

UPDATE 1-Russia pauses rate cuts after U.S. sanctions spur inflation risks

MOSCOW, April 27 (Reuters) - The Russian central bank kept its key interest rate unchanged on Friday, putting its rate-cutting cycle on hold in response to new U.S. sanctions and indicated there was less room for further rate cuts.

In an expected move, the central bank kept the key rate at 7.25 percent after cutting it twice earlier this year. The last time the central bank left the rate unchanged at one of its scheduled rate meetings was in July 2017.

“The April weakening in the rouble against the backdrop of geopolitical tension will be a factor for consumer price growth paces to quicken as they move closer to 4 percent,” the bank said in a statement.

The bank’s decision was in line with market expectations that the Bank of Russia would postpone a planned rate cut following a massive market sell-off triggered by new U.S. sanctions on Moscow announced on April 6.

The sanctions, which hit some of Russia’s biggest companies and most prominent businessmen, sent the rouble down to its weakest level since 2016, raising concerns that the weaker currency would soon translate into rising prices.

“The Bank of Russia considers that the potential key rate reduction intended to bring about neutral monetary conditions has decreased given the rise in interest rates across advanced economies and country risk premium growth for Russia,” the central bank said.

The rouble showed muted reaction to the rate decision, trading at 62.68 versus the dollar.

The central bank, however, said it was still considering switching to a so-called neutral monetary policy in 2018 as annual inflation was below its 4 percent target, hovering at 2.3-2.5 percent in April.

“The Bank of Russia’s estimates suggest that the potential for key rate reduction to shape neutral monetary conditions shrank somewhat,” it said.

Now, the estimated neutral interest rate has shifted closer to its upper limit within the range of 6–7 percent, the central bank said.

The central bank is due to hold its next rate-setting meeting on June 15, which will be followed by a news conference with Governor Elvira Nabiullina. (Reporting by Andrey Ostroukh and Jack Stubbs Editing by Andrew Osborn)

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