Russia Central Bank Unexpectedly Cuts Key Rate, Signals More Reduction

Russia's central bank unexpectedly reduced its key interest rate on Friday, after holding it steady for three sessions in a row, and said it could lower it further as inflation slowdown was faster-than-expected amid an economic recovery though risks remain elevated.

The Board of Directors decided to reduce the key rate from 10.00 percent to 9.75 percent, the Bank of Russia said in a statement.

Policymakers noted that inflation slowdown overshoots the forecast, inflation expectations continue to decline and economic activity recovers. However, inflation risks have slightly dropped but remain elevated, they added.

"In these circumstances, given the moderately tight monetary policy, the 4 percent inflation target will be achieved by the end of 2017 and will be maintained at this level further," the bank said.

"While assessing evolving inflation dynamics and economic developments against the forecast, the Bank of Russia admits the possibility of cutting the key rate gradually in coming Q2-Q3."

The bank forecast inflation to ease to 4 percent by the end of this year and will remain within this target range in 2018-2019. Price growth was 4.3 percent in the first twenty days of March versus 5 percent in January.

Moderately tight monetary policy will allow to limit their effects and maintain consumer price growth rates close to 4 percent, the bank said.

That said, rate-setters noted that risks that inflation will miss the 4 percent target by year-end have abated, but they remain in the medium term.

Economic growth was also proceeding at a faster-than-expected pace, the bank said. The bank forecast GDP growth of 1-1.5 percent this year and by 1-2 percent in 2018-2019.

The bank said that the forecast is based on the assumption of an oil price reduction to $40 per barrel by the end of 2017.