* Russian inflation at post-Soviet low, below bank target
* Bank sees return to “neutral” monetary policy in 2018 (Adds detail, analyst comment)
By Jack Stubbs and Maria Kiselyova
MOSCOW, Feb 9 (Reuters) - Russia’s central bank cut its key interest rate on Friday to 7.5 percent after inflation hit a record low last month and said it would lower borrowing costs further in coming months, completing its transition to a “neutral” monetary policy this year.
The 25 basis point cut, which came after inflation slowed to a “sustainably low” level of 2.2 percent well below the bank’s 4 percent target, was in line with the forecasts of 18 of 20 analysts and economists polled by Reuters.
“Annual inflation remains sustainably low. Inflation expectations are diminishing progressively. Short-term pro-inflationary risks have abated,” the central bank said in a statement.
“This year annual inflation is much less likely to exceed 4 percent. In this environment the Bank of Russia will continue to reduce the key rate and may complete the transition from moderately tight to neutral monetary policy in 2018.”
Inflation is seen holding below 4 percent in 2018 and remaining close to that level next year, the bank said.
The rouble firmed to 57.92 versus the dollar after the rate decision, compared to a rate of 58.11 shortly before.
Lower rates are likely to please Russian voters by making consumer credit and mortgages cheaper in the run-up to a presidential election on March 18, when incumbent Vladimir Putin is widely expected to win a further six years in power.
The central bank cut its key rate six times last year as inflation, once stubbornly stuck at double-digit levels, slowed. January marked its lowest level since the fall of the Soviet Union in 1991.
Bank governor Elvira Nabiullina said last week the key rate could be brought to a “neutral” level of 6 or 7 percent sooner than previously planned.
VTB analyst Alexander Isakov said he did not expect a significant market reaction to Friday’s decision, but said the central bank had clearly telegraphed the action it would take at its next rate-setting meeting on March 23.
“The Bank of Russia’s new signal says that the decision in March is practically predetermined: the Bank of Russia will continue with policy easing,” Isakov said.
VTB now sees the central bank cutting the key rate to 7 percent by the end of the first half of the year, he added.
The central bank’s ability to stick to its rate-cutting policy has been helped by a U.S. decision to hold off imposing sanctions on Russian sovereign debt.
The bank stopped short of commenting directly on Friday on the possibility of future U.S. sanctions, but said it would continue to monitor risks to inflation “posed by external factors”.
The Kremlin will hope that a more buoyant economy, supported by cheaper credit, will encourage voters long frustrated with lower living standards to turn out in larger numbers to vote in next month’s presidential election.
In its statement, the central bank acknowledged greater uncertainty in global financial markets, amid a rout in global equity markets sparked by inflation fears. (Writing by by Jack Stubbs; Editing by Gareth Jones)