By Elena Fabrichnaya and Gleb Bryanski
MOSCOW (Reuters) -The Russian central bank cut its key interest rate by 100 basis points to 17% on Friday, less than analysts had expected, pointing to stubbornly high inflation.
"Inflation expectations have not changed considerably in recent months. In general, they remain elevated. This may impede a sustainable slowdown in inflation," the bank said in a statement.
Analysts polled by Reuters on September 8 predicted a 200 basis points cut, although the rouble's
5% fall this week had raised doubts about whether the central bank would ease that far.
"Proinflationary risks still prevail over disinflationary ones in the mid-term horizon," the central bank said, adding that such risks were associated with a "longer upward deviation of the economy from a balanced growth path and high inflation expectations, as well as with a deterioration in the terms of external trade".
The rouble strengthened by 0.8% to 83.80 against the dollar by 1115 GMT, reversing some of this week's losses.
"A weaker step towards reduction was the result of the rouble's depreciation due to increased lending and accelerated growth in the money supply," said Ilya Fedorov from BKS brokerage.
The rouble's rally of over 40% in the early part of this year had helped the central bank fight inflation by making imported goods cheaper. The bank mentioned the exchange rate only briefly as a potential proinflationary factor.
STAGNATING ECONOMY
Russia's economy is experiencing a sharp slowdown, with growth expected to fall from 4.3% in 2024 to 1.2% this year. Some economists and business leaders are warning about stagnation or even recession.
The latest data showed month-on-month deflation of 0.4% in August, a month when cheap new-harvest fruit and vegetables usually bring prices down. On an annual basis, inflation slowed to 8.14% in August from 8.79% in July.
Last October, the central bank hiked its key interest rate to 21%, the highest in over 20 years, to combat inflation, which has been spurred by high military spending on the conflict in Ukraine.
This move brought lending rates in the economy to a prohibitive 25% or more, with many enterprises no longer able to invest, and vulnerable sectors such as construction, coal and metals suffering the most.
German Gref, CEO of Russia's largest bank, Sberbank, and one of the few influential public figures in Russia who sometimes contradicts the official line, said last week that the economy was in a state of "technical stagnation".
According to statistical data, it grew by 1.1% in the second quarter, year-on-year. A graph published by the central bank last week showed GDP contraction in the first and second quarters on a quarterly basis.
President Vladimir Putin denied last week that the economy was stagnating, citing continued growth in lending, and supported the central bank's hard line on rates.
The bank has previously said prudent fiscal policy is an important factor in keeping inflation in check. However, faced with lower energy revenues, Russia now appears set to exceed the planned deficit of 1.7% of GDP this year.
The central bank said fiscal normalisation "has not yet materialised taking into consideration the budget deficit accumulated since the beginning of this year".
It added that the parameters of the new budget, due to be submitted to parliament this month, might force it to adjust monetary policy again.
(Additional reporting by Darya Korsunskaya, Anastasia Lyrchikova, writing by Gleb Bryanski; Editing by Mark Trevelyan)
