Russian central bank signals rate cut pause to meet inflation goal

MOSCOW (Reuters) - Russia’s central bank will probably leave interest rates on hold for the rest of the year after cutting them on Friday, its governor said, stressing cautious monetary policy was the best way to achieve consistently low inflation.

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The hawkish comments by Elvira Nabiullina will add to the view the bank is determined to meet its 4 percent inflation target next year even if that means the economy will stay weak.

The central bank cut its key rate RUCBIR=ECI by 50 basis points to 10 percent on Friday in only the second easing step this year, even though inflation RUCPIY=ECI has slowed to 6.6 percent in mid-September from 9.8 percent in January.

“The trajectory for cutting rates is tailored specifically to the goal of lowering inflation to 4 percent,” Nabiullina told a news conference after the rate decision, which was in line with economists’ expectations.

“As regards lowering rates this year, according to our base forecasts it is a very unlikely scenario.”

Nabiullina has won plaudits for steering Russia through a deep economic crisis precipitated by slumping oil prices and Western sanctions over the Ukraine conflict. She has resisted pressure to cut rates quickly to rekindle economic growth.

The central bank’s board agreed unanimously to lower borrowing costs on Friday, Nabiullina said, adding the bank believed market expectations for policy easing were overdone. Next year the central bank could cut rates in smaller 25 basis point increments, she said.

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Analysts said the central bank’s rhetoric was tougher than expected and speculated the bank could be concerned about inflation risks linked to fiscal policy or the possibility the Federal Reserve will soon raise U.S. interest rates.

Nabiullina said that in order for inflation expectations to become anchored around 4 percent, the central bank would need to keep interest rates above inflation even after the 4 percent target was met.

She said the economy was not yet recovering in a balanced manner, though quarterly gross domestic product could turn positive in the second half of this year.

Next year the central bank expects Russian gross domestic product growth to be weak at below 1 percent, given sluggish growth in the global economy and an average price of around $40 per barrel for oil, the country’s main export.

Editing by Christian Lowe and Catherine Evans