Russia holds key rate at 8.25%, hints at cuts

Russia's central bank held the main interest rate at 8.25 percent for the 11th month running on Friday while leaving the way open for future cuts on easing concern about inflation. The decisions surprised analysts who had predicted the start of a monetary easing policy amid Russia's slowest growth rates since the 2008-2009 global financial crisis. The central bank -- led since June by President Vladimir Putin's close ally Elvira Nabiullina -- has been grappling with the dilemma of anaemic growth and inflation that has outpaced the year's 5.0-6.0 percent target. But inflation slowed to 6.5 percent in July from 6.9 percent in June -- a positive trend that the central bank underscored on Friday. The bank said it did not detect significant demand-side pressure on prices and pointed to economic output that was "somewhat lower than its potential level." "According to central bank forecasts ... inflation will slip back into its target range in the second half of 2013 and keep to this lowering trend in 2014," the central bank statement said. The bank noted that steady consumer demand has helped lift growth to a still-meagre 2.0 percent of gross domestic product in the second quarter from 1.6 percent in the first three months of 2013. But it stressed that below-par investment activity "and the slow recovery of external demand point to substantial risks of a Russian economic slowdown." Recent analyst surveys showed about half of Russia's main banks had forecast a 25-basis points cut on Friday and another 0.25 percent reduction to the main interest rate by the end of the year. The economists also noted that inflation expectations may be tempered in the short-term by output growth that usually follows an infusion of cheaper credit into the banking system. "Together with the recent decline in capacity utilisation ... the economy is running a negative output gap and the situation is continuing to deteriorate," VTB Capital said ahead of Friday's decision.