Russia lowers key rate to 6.5%, signals future cuts

RUSIA - MOSCOW. The Russian central bank carried out its biggest interest rate cut in two years on Friday, trimming the key rate to 6.50% from 7%, and hinted it could slash the rate again in coming months because of slowing inflation.

The central bank's move exceeded market expectations . In a Reuters poll earlier this month, most analysts predicted the central bank would trim the rate by 25 basis points instead of 50 basis points.

While delivering the unusually large cut, the central bank left unchanged its forward-looking guidance from last month's board meeting, where it cut the rate by 25 basis points to 7%.

"If the situation develops in line with the baseline forecast, the Bank of Russia will consider the necessity of further key rate reduction at one of the upcoming Board of Directors' meetings," the central bank said in a statement.

The central bank said it cut rates because consumer inflation, a key indicator it strives to keep under control, slowed to 3.8% as of Oct. 21, below its 4% target.

"Inflation slowdown is overshooting the forecast," the central bank said. "Disinflationary risks exceed pro-inflationary risks over the short-term horizon."

The slowdown in inflation on Friday prompted the central bank to revise its inflation forecast for the end of 2019 to 3.2%-3.7% from 4.0%-4.5%

The central bank also lowered its 2020 inflation forecast to 3.5-4.0% from around 4% but warned that the country still faced pro-inflationary risks in the long term.

The bank said "elevated and unanchored inflation expectations" pose a significant risk to a stable inflation level. It also said that Russian fiscal policy, including decisions on the use of the reserves in its National Wealth Fund, could drive inflation higher.

Elvira Nabiullina, governor of the central bank, cemented expectations of rate cuts earlier this month when she said the bank was ready to act "more decisively" when cutting interest rates.

WHAT'S NEXT?

The central bank did not offer any clues regarding the possible size of future cuts or the key rate's future trajectory. Analysts were also divided on whether the central bank would cut the rate in December or hold off until 2020.

"It's possible that the central bank will take a break at its next board meeting in December in order to assess the future inflation dynamic and international events," said Vladimir Tikhomirov, chief economist at BCS Brokerage.

Kirill Tremasov, a former economy ministry official and now head of research at Loko-Invest, said that the central bank was allowing for a rate cut in December, but that it was too early to speak of its size and inevitability.

Russia's central bank considers its monetary policy to be neutral when the rate lies between 6% and 7%. If the bank were to trim the rate by 50 basis points again, it would find itself on the lower threshold of neutral monetary policy.