2016.09.1609:35:00UTC+00Russia Cuts Rate Again

Russia's central bank reduced its key policy rate on Thursday, citing the inflation slowdown, after leaving it unchanged in July following a cut in June.

"The Board of Directors decided to reduce the key rate from 10.50 to 10.00 percent p.a. given the inflation slowdown, in line with the forecast, decrease in inflation expectations and unstable economic activity," the Bank of Russia said in a statement Friday.

"However, for the trend towards sustainable decline in inflation to strengthen, according to the Bank of Russia's estimates, the current value of the key rate needs to be maintained till end-2016 with its further possible cuts in 2017 Q1-Q2."

Bank of Russia Governor Elvira Nabiullina is set to hold a post-decision press conference late on Thursday.

The bank expects annual inflation to be 4.5 percent in September 2017 and then go down to the 4 percent target in late 2017.

The recent slowdown in inflation from 7.2 percent in July to 6.6 percent on September 12 was largely shaped by the ruble dynamics amid more favorable external economic environment than expected earlier.

"Keeping the key rate at 10.00 percent p.a. during a rather long period of time will shape monetary conditions conducive for the trend towards a further persistent slowdown in inflation under the influence of demand-side constraints," the bank said.

"The risks of failure to deliver the inflation at the 4 percent target in 2017 persist mainly due to the inertia of inflation expectations and potential weaker household saving motives," the bank added.

Ruble stabilization and the good harvest outlook are also expected to contribute to lowering consumer price growth and consequently, reduce inflation expectations.

Positive quarterly GDP growth is possible in the second half of this year, the bank said, Yet, the bank expects growth not to be high in 2017, staying below 1 percent.

"The statement accompanying today's decision by the Russian MPC to lower interest rates was much less dovish than we had expected and signaled that further interest rate cuts are off the cards until 2017," Capital Economics economist Liza Ermolenko said.

"We still think there's room for significant monetary easing over the next year or so, although the clear risk now is that this will come later and be smaller than we had previously anticipated."