July 27, 2018 / 10:46 AM / 10 months ago

UPDATE 2-Russia holds rates, hints that cut is possible in 2019

* Central bank holds key rate for third consecutive time

* It confirms that room for rate cut in 2018 is limited

* Next rate-setting meeting on Sept. 14 (Adds analyst comments, context)

By Andrey Ostroukh

MOSCOW, July 27 (Reuters) - The Russian central bank kept its interest rates unchanged on Friday, citing risks of higher inflation, and indicated that it had no plans to lower rates by the end of this year.

Russia has been cutting rates over the past few years as once stubbornly high inflation has dipped to record lows, below the central bank’s target of 4.0 percent. But the rate-cutting cycle stumbled at the government’s call for a tax increase.

Friday’s was the third consecutive meeting at which the bank’s board decided to hold the key rate at 7.25 percent , in line with a Reuters poll of analysts.

“Uncertainty persists over how strongly the tax measures may affect inflation expectations and how external conditions will develop,” the central bank said in a statement.

Explaining its decision, the central bank cited an increase in value-added tax (VAT) to 20 percent from next year from 18 percent, which it said would already translate into higher inflation this year.

Annual inflation, at 2.3 percent in June, is on track to accelerate to 3.5-4.0 percent by the end of the year and exceed the 4.0 percent target in 2019, said the central bank, whose main task is to control inflation.

“The Bank of Russia considers that monetary policy is highly likely to shift to a neutral stance in 2019,” it said.


Until the government announced a VAT rise, the bank had planned to switch to a so-called neutral monetary policy in 2018, bringing the key rate into a range between 6 and 7 percent.

The central bank’s call came in line with a Reuters consensus poll of analysts last month that indicated the market expects no rate cuts by the end of 2018. But some monetary easing is still likely in 2019, pundits say.

“We stick to the view that the CBR will keep rates on hold this year and at least until the second quarter of 2019,” Morgan Stanley analysts said in a note.

Other analysts said, however, if the boost to inflation from the VAT increase proves to be weaker than thought, the central bank should consider cutting rates earlier.

“The rate cuts may come sooner than expected, if inflation stays sustainably below 4 percent in the fourth quarter of 2018 to the second half of 2019, and GDP growth surprises to the downside versus the central bank’s base-case scenario of 1.5-2 percent in 2018-19,” said Dmitry Polevoy, chief economist at Russian Direct Investment Fund.

Analysts at the Capital Economic research firm said they expected the Bank of Russia to cut the key rate to 6.50 percent over the second half of 2019 and then to 6.00 percent in 2020.

The next rate-setting meeting is scheduled for Sept. 14 and will be followed by a press conference with the bank’s governor, Elvira Nabiullina, who is expected to shed more light on policy. (Reporting by Andrey Ostroukh Additional reporting by Katya Golubkova Editing by Kevin Liffey)

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