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Russia's central bank seen cutting key rate to 7pc on Friday

MOSCOW: The Russian central bank is seen cutting its key rate, now at 7.25%, for a third time this year on Friday am

Sep 02 2019

MOSCOW: The Russian central bank is seen cutting its key rate, now at 7.25%, for a third time this year on Friday amid a steady decline in inflation and sluggish economic growth, a Reuters poll showed on Monday.

Twenty-four out of 25 analysts and economists in the poll predicted that the central bank would lower the key rate to 7.00% at the rate-setting meeting.

"A combination of August deflation, moderating inflation expectations and subdued pace of economic activity argue strongly for such a decision," analysts at Citi said in a note.

The central bank said at its previous board meeting in late July that more cuts were likely later this year amid slowing inflation.

A slowdown in consumer inflation to 4.4% in July from 4.6% in June, closer to the central bank's target of 4%, cemented expectations of a rate cut this week. The Economy Ministry has even warned that inflation was on track to undershoot the central bank's target by the end of this year.

The central bank will announce its rate decision at 1030 GMT on Friday, and Governor Elvira Nabiullina will shed more light on the bank's decision and outlook at a news conference scheduled for 1200 GMT.

The expert in the poll who predicted the central bank to keep the rate unchanged was Vladimir Tikhomirov, chief economist at BCS brokerage, who pointed at the probability of higher inflationary risks in the mid-term.

A planned increase to pensions, higher state spending, global economic instability, an outflow of investors' money from emerging markets and the recent drop in the rouble all suggest it is too early to lower the key rate, Tikhomirov said.

The has rouble lost around 5% of its value against the dollar since the previous rate meeting on July 26 , raising concerns that its weakness could filter into consumer prices and boost inflation.

But other economists said that the mentioned risks, including the aftermath of the weaker rouble, should only result in a more cautious approach to rate cuts in the future.

"The recent weakening of the rouble may only justify a more cautious accompanying statement, but is not strong yet enough to warrant a pause in the rate-cutting cycle," Citi analysts said.

The 25 basis point cut would bring the key rate to the 6-7% range, which the central bank had described as neutral from its monetary policy point of view. The central bank had planned to switch no neutral policy in the first half of 2020.

"Given the recent rouble weakness, we think it is premature to change the guidance to a more dovish one, so we expect the CBR to signal a pause or at least to hint at a slower pace of rate cuts going forward," said Alina Slyusarchuk, an economist at Morgan Stanley.

Copyright Reuters, 2019