November 16, 2017 / 1:40 PM / a month ago

UPDATE 1-Russia central bank planning more cuts to key rate, may resume foreign currency buys

(Adds quotes, detail)

By Elena Fabrichnaya

MOSCOW, Nov 16 (Reuters) - The Russian central bank will cut its key interest rate to 6-7 percent over the next years and may resume purchases of foreign currency for its reserves when inflation stabilises at low levels, its governor said on Thursday.

After two years of a full-blown economic crisis, the Russian economy is on the mend and the central bank is preparing for slower, stable inflation.

Once inflation anchors, the central bank may resume buying foreign currency for its reserves, something it last did in mid-2015, Elvira Nabiullina, the bank’s governor, told Russia’s lower house of parliament.

Nabiullina said the central bank retains its long-term target of bringing the amount of reserves to $500 billion from around $425 billion at the moment.

“We plan to buy foreign currency for reserves only after we become confident that inflation and inflationary expectations are steady at low levels,” Nabiullina said.

Inflation in Russia, which was stubbornly high at double-digit levels a few years ago, has now slipped below the central bank’s 4 percent target to post-Soviet lows.

But inflationary expectations still remain high, which keeps the central bank from cutting the key rate deeper, Nabiullina said.

Annual inflation now hovers at 2.6 percent and is likely to stay at 2.5-2.7 percent by the end of this year, she said.

Nabiullina said the central bank would soften its monetary policy slowly and gradually, bringing the key rate to 6 percent to 7 percent in the next one or two years from 8.25 at present.

Lower interest rates are aimed at reviving lending activity, needed to prop up economic growth.

Nabiullina said the Russian economy will expand 1.8 percent in 2017, marking the end of the recovery from two years of economic recession.

Reporting by Elena Fabrichnaya; Writing by Polina Nikolskaya and Andrey Ostroukh Editing and Graphic by Jeremy Gaunt.

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