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Russian central bank lowers key rate to 8.25 percent, signals further cuts
October 27, 2017 / 10:52 AM / a month ago

Russian central bank lowers key rate to 8.25 percent, signals further cuts

MOSCOW (Reuters) - The Russian central bank delivered a cautious 25 basis point rate cut on Friday and said it would consider lowering rates further in the coming months.

Russian President Vladimir Putin (L) meets with Central Bank Governor Elvira Nabiullina outside Moscow, Russia October 27, 2017. Sputnik/Alexei Nikolskiy/Kremlin via REUTERS

The central bank cut its key rate to 8.25 percent from 8.5 percent, its fifth rate reduction so far this year.

The cut was in line with market expectations. Sixteen of 20 pundits polled by Reuters had predicted the central bank would lower its key rate by 25 basis points RUCBIR=ECI, while others predicted a 50 basis point cut.

A monetary easing cycle became possible this year as annual inflation, once stubbornly high, tumbled to post-Soviet lows.

Even though actual inflation has slipped below the central bank’s 4 percent target to 2.7 percent in annual terms as of Oct. 23, the central bank highlighted that inflation expectations remained elevated.

“Medium-term risks of inflation overshooting the target dominate over the risks of its persistent downward deviation,” the central bank said.

Nevertheless, as the key rate is far above annual inflation readings, the central bank confirmed its commitment to bring the key rate to 6.5-7.0 percent in 2019.

“The Bank of Russia Board of Directors leaves open the option of further rate reductions at forthcoming meetings,” the central bank said in a statement.

It said it would gradually move to “neutral monetary policy” from its current “tight monetary policy”.

This wording could mean that the central bank will opt for smaller cuts in the future, said Natalia Orlova, chief economist at Alfa Bank.

The rouble briefly firmed to 58.00 versus the dollar compared with a level of 58.14 shortly before the rate decision.

The central bank noted in the statement that the stronger rouble was one of the reasons behind this year’s inflation slowdown.

“Overall, the CBR stays very cautious, sticking to its ‘CPI back to 4 percent’ view in 2018 despite the better than expected recent CPI trends,” Dmitry Polevoy from ING Bank said in a note.

“We still challenge this and think the undershoot is more persistent,” he said, adding that another 25 basis point rate cut was likely in December.

Oleg Kouzmin, economist at Renaissance Capital in Moscow, said both 25 basis point and 50 basis point rate cuts were possible by the end of the year.

The central bank, which on Friday also confirmed its economic outlook and its call for a 2.2 percent economic growth in 2017, will hold the next rate meeting on Dec. 15.

In December, the rate decision will be accompanied by a news conference with Governor Elvira Nabiullina as well as by a new set of forecasts.

Additional reporting by Polina Nikolskaya; Editing by Richard Balmforth

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