Russia holds rate, sees lower inflation, economic risks

    Russia's central bank held its policy rates steady and expects inflation to return to its target range in the second half of the year and fall further next year provided inflationary expectations remain sustainable as there are no significant demand-side inflationary pressures.
    The Bank of Russia, which last cut rates in September 2012, also said there were "persisting risks of further economic slowdown" due to the combination of weak investment activity and sluggish economic recovery.
    "The Bank of Russia will continue to monitor inflation risks and the downside risks to economic growth. In making monetary policy decisions the Bank of Russia will be guided by inflation goals and economic growth prospects," the bank said.
    A decline in inflation in recent months and expectations for a further fall along with the central bank's emphasis on the downside risks to growth signal that the central bank is preparing to cut rates in coming months, as expected by most economists.

    The Bank of Russia held its benchmark refinancing rate steady at 8.25 percent along with its other main rates, including a minimum 5.75 percent rate on 12-month loans secured by non-marketable assets, an refinancing instrument that was introduced last month.

    Russia's inflation rate eased to 6.5 percent in July from 7.4 percent in June, the lowest in eight months but still above the bank's 5-6 percent target range. As of August 5, the bank estimated an inflation rate of 6.5 percent.
    The recent decline in inflation is mainly due to lower food prices, the bank said, adding that core inflation eased to 5.6 percent in July.
   "According to the Bank of Russia estimates, there is no significant demand side inflationary pressures, as gross output stands slightly below its potential level," the bank said.
    Russia's Gross Domestic Product contracted by 0.07 percent in the first quarter from the fourth quarter for annual growth of 1.6 percent, down from 2.1 percent in the previous quarter.
    The central bank said industrial output remains subdued and investment in production capacity is continuing to decrease and there has been some increase in the unemployment rate in recent months.
    "Consumer demand supported by the real wage and retail lending growth remains the major driver for economic growth," the central bank said.

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