Russia cuts rates but warns pace of easing could slow

[June 15, 2015]  By Lidia Kelly and Alexander Winning

MOSCOW (Reuters) - The Russian central bank cut its main lending rate further on Monday, in line with market expectations, but said the pace of policy easing could slow in the coming months because of risks to inflation.

The bank lowered its one-week minimum auction repo rate to 11.5 percent from 12.5 percent, extending an easing cycle that began in January to unwind an emergency 6.5 percentage point rate hike late last year.

It has come under pressure to soften monetary policy as inflation has slowed and economic data has worsened. Russia's economy is feeling the impact of Western sanctions over the crisis in Ukraine and a fall in global oil prices.

"The Bank of Russia will be ready to continue cutting the key rate as inflation risks abate," it said in a statement. "But the potential of monetary policy easing will be limited by inflation risks in the next few months."

The bank repeated it was concerned about a "considerable" cooling of the economy but improved its 2015 gross domestic product forecast to a contraction of 3.2 percent from 3.5 to 4 percent previously.

"The further economic situation will depend on the dynamics of energy prices and the economy's ability to adapt to external shocks," the bank said.

The rouble briefly strengthened after the rate decision but soon fell back.

Analysts described the wording of the bank's statement as less dovish.

The central bank said it saw annual inflation slowing to less than 7 percent in June 2016 and to its target level of 4 percent in 2017.

Inflation eased from a peak of 16.9 percent in March to 15.8 percent in May, but a recent bout of rouble weakness and potential utility tariff hikes could hamper inflation from declining much further soon.

Weaker oil prices and sanctions continue to squeeze Russia's export earnings and dampen investment. Russian banks in particular have suffered, and some analysts say the pain felt by banks was an important reason behind earlier rate cuts.

"We still expect the central bank to continue to cut rates over the remainder of the year, but they may do so in smaller steps," said William Jackson at Capital Economics in London.

"We might see 50 basis point cuts over the next few meetings."

(Additional reporting by Elena Fabrichnaya, Oksana Kobzeva and Andrey Kuzmin; Editing by Timothy Heritage and Elizabeth Piper)

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