Russia central bank cautious on eve of dollar buying

[February 03, 2017]  By Andrey Ostroukh and Alexander Winning

MOSCOW (Reuters) - Russia's central bank kept its main lending rate unchanged on Friday and said it saw less room for rate cuts as inflation risks have risen with plans to buy dollars for the country's fiscal funds.

The decision to keep the key rate at 10.0 percent  was in line with market expectations and left the cost of lending at the level it has been since September 2016.

The central bank dropped its pledge to consider reducing rates in the first half of 2017 and instead replaced it with a cautious line on the limitations it faced in easing policy.

"Given the internal and external developments, the Bank of Russia's capability to cut its key rate in the first half of 2017 has diminished," the bank said in a statement.

It said interest rates would be kept at a level ensuring demand for loans without increasing inflationary pressure.

The bank is clearly telling the market it should not bet on a rate cut next month, said Irina Lebedeva, a debt analyst at Uralsib Capital in Moscow.

Market expectations for rate cuts were already low after the finance ministry and the central bank announced last month that they would buy dollars to replenish Russia's depleted fiscal coffers starting in February.

The finance ministry said separately on Friday that dollar purchases would begin on Feb. 7 and amount to around $100 million a day this month.

Those purchases could weaken the rouble and hence halt a slowdown in inflation, although the central bank said on Friday that the risks to inflation were not considerable.

People involved in discussions on the foreign-currency purchases have told Reuters the central bank had feared investors would regard the purchases as currency interventions designed to weaken the rouble.

A Russian national flag flies over the Central Bank headquarters in Moscow, Russia, May 17, 2016. REUTERS/Sergei Karpukhin/File Photo

"They are over-cautious, they are behaving with the market like with a child," Alexey Pogorelov, chief Russia economist at Credit Suisse, said of the central bank's Friday decision.

"This is how you need to behave with the Russian market. When they hear about interventions, locals are always bearish on the rouble."

The Russian currency firmed slightly to 59.3 versus the dollar as of 1100 GMT from levels of 59.5 seen before the rate decision.

The central bank gave no new economic forecasts on Friday, merely saying growth was recovering faster than predicted.

Risks that annual inflation will fail to slow to its long-held target of 4 percent this year remain, it said, adding that it still thinks it will reach its goal.

Central bank Governor Elvira Nabiullina is expected to present a new set of forecasts and updated guidance after the next rate-setting meeting on March 24.

(Additional reporting by Elena Orekhova; Editing by Christian Lowe/Mark Heinrich)

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