Russia Trims Rate By 25 Bps, Signals More Cuts

Russia's central bank lowered its key interest rate for a third time this year on Friday and signaled more reduction in future, as inflation approaches its 4 percent target.

The Board of Directors decided to reduce the key rate to 9.00 percent from 9.25 percent, the Bank of Russia said in a statement. The decision was in line with economists' expectations.

Previously, the bank trimmed the rate by 50 basis points in April and by 25 basis points in March.

The bank said it sees room for cutting the rate in the second half of 2017.

Rate-setters noted that inflation is close to the target, inflation expectations keep declining, and economic activity is recovering.

"Inflation risks were down in the short term, while they remain in place in the medium term," the bank said.

The bank vowed to continue to conduct moderately tight monetary policy to maintain inflation close to the 4 percent target.

Moderately tight monetary conditions played an important role in slowing down inflation. Household consumption is on the rise alongside with the growth in investment and industrial output.

Currently, a moderate growth in consumer expenditures does not exert any inflationary pressure under increased supply of goods and services, the bank noted.

Considering the current recovery trends, the central bank raised its GDP growth rate forecast to 1.3-1.8 percent for this year. Economic growth is getting closer to its potential level, the bank added.

Policymakers said growth rate higher than 1.5-2 percent will be reached if structural reforms take place.

William Jackson, an economist at Capital Economics, expects inflation to fall below the 4 percent target in the second half of this year and stay there in 2018, allowing sizable easing.

The economist forecast the policy rate to be lowered to 6 percent by the end of next year, whereas the markets expect it to settle at around 7 percent.