Moscow - Russia's central bank left its key interest rate on hold as expected at a regular board meeting on Monday, citing concerns about high inflation, and warned that further rate hikes may be possible if inflation remained above target.
The decision leaves the bank's major policy rate, the one-week minimum auction repo rate, unchanged at 7.5 percent, after cumulative rate hikes of 200 basis points in March and April linked to financial instability caused by the crisis in Ukraine.
The central bank has played down expectations of rate cuts in the near future, arguing that it cannot afford to relax monetary policy at a time when inflation, which hit 7.6 percent as of June 9, remains well above the bank's 5 percent target for the end of 2014 and its medium-term target of 4 percent.
“Taking into account that monetary policy influence on the economy is distributed over time, inflation slowing to the 5.0 percent target in 2014 is unlikely,” the bank said in a statement.
It added that a continuing slowdown in Russia's economy was having little restraining influence on inflation as the slowdown was largely caused by structural factors, citing unfavourable demographic trends, high capacity utilisation, sluggish labour productivity growth and declining capital investment.
The bank forecast that economic growth in 2014 will be 0.4 percent, slightly below the government's forecast of 0.5 percent, although it predicted a slight acceleration in the second half of the year.
It said the current monetary stance would enable inflation to fall to target levels in the medium term, but warned that “the risk of inflation exceeding the target remains high not only in the short term but also in the medium term”.
“If these risks materialise and it puts medium-term inflation targets under threat, the Bank of Russia will continue increasing the key rate,” it said.
The steep rate hikes in March and April coincided with heavy selling pressure on the rouble, stemming from the political crisis in neighbouring Ukraine, which has fuelled capital flight from Russia amid fears of tougher western sanctions.
Although the rouble has seen a strong rally in recent weeks the central bank has warned that it is too soon to relax its guard, citing continuing signs of financial instability.
The rouble was little changed after the central bank's expected decision to hold rates, but down 0.5 percent against the dollar on the day to 34.63, dragged lower by fighting in east Ukraine and a gas dispute between Moscow and Kiev. - Reuters