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UPDATE 2-Russia cuts rates as inflation falls to more post-Soviet lows
March 24, 2017 / 10:50 AM / in 7 months

UPDATE 2-Russia cuts rates as inflation falls to more post-Soviet lows

* Russian c.bank cuts rate by 25 bps to 9.75 pct

* Rapid disinflation allows first rate cut since Sept

* Gradual cuts in pipeline, monetary policy to stay tight

* Key rate now at level last seen in 2014

* Graph: Russia's rates bit.ly/2neVbUX (Writes through after Nabiullina news conference)

By Andrey Ostroukh and Alexander Winning

MOSCOW, March 24 (Reuters) - Russia’s central bank trimmed its main lending rate on Friday and said there could now be gradual easing as inflation eases down to new post-Soviet lows.

After holding the key rate at 10 percent since September, the central bank cut it to 9.75 percent, saying inflation was slowing down quicker than forecast.

It signalled small cuts could follow in the second and third quarters of the year.

“We could have pauses, though we really see a trend towards easing, towards lowering the rate in the medium term,” Central Bank Governor Elvira Nabiullina said.

“But we will do that very carefully and smoothly.”

The bank is focused on bringing inflation to 4 percent by the end of the year and has kept policy tight since 2014 despite a deep economic slump brought on by the collapse in global oil prices and Western sanctions over the Ukraine crisis.

The decision to ease policy on Friday came despite the majority of analysts predicting in a Reuters poll the extremely cautious bank would hold rates.

Nabiullina said at a news conference that further rate cuts could come at any board meeting.

While the central bank pointed to a slowdown in inflation from 5 percent in January to 4.3 percent in March, it expressed concerns about the inertia of inflation expectations and volatility on global markets.

“To keep inflation close to the target level there could be a need to retain moderately tight monetary policy on the horizon of two to three years,” Nabiullina said.

Capital Economics said in a research note it took Nabiullina’s rhetoric to mean the central bank was not yet on the brink of lowering interest rates dramatically.

Previously, Nabiullina has said the key rate should exceed inflation by 2.5-3 percentage points. Given her bank’s 4 percent inflation target, this suggests the key rate could be held above 6.5-7 percent over the next few years.

Citi economists said they thought the key rate would fall to 8.5 percent by the end of the year.

The central bank also said on Friday it was more optimistic on the prospects for economic recovery, now seeing gross domestic product growing by 1-1.5 percent in 2017 compared with a previous forecast for GDP growth of less than 1 percent.

It expects oil prices to average $50 per barrel this year.

The central bank is set to hold its next rate-setting meeting on April 28.

Reporting by Andrey Ostroukh and Alexander Winning; Editing by Christian Lowe/Jeremy Gaunt

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