Russia holds rates as inflation unexpectedly slows

Russia's central bank held its main interest rate in check on Friday after a surprise slowdown in October inflation snapped a trend of sharply rising consumer prices through the second half of the year.

The bank's board left the refinancing rate unchanged at 8.25 percent in the face of slowing economic expansion and a downtick in consumer price increases to a year-on-year rate of 6.5 percent in October from 6.6 percent the month before.

The board said current trends still meant that the annual target inflation rate of 7.0 percent -- already revised up once by the government -- was still in danger even if the monthly pressures "had slightly eased".

"We noted in a slowdown in the rise of prices for a number of food products and the rise in interest rates conducted by the Bank of Russia in September 2012... could help form more measured inflation expectations," the board said in a statement.

Russia had become the world's biggest economy to raise rates this year when it unexpectedly increased the main borrowing cost from 8.0 percent on September 13 -- a partial response to a global hike in the price of food.

The central bank has been left in the uncomfortable position of having to move against consumer prices rises despite signs that economic growth was stalling in the second half of the year.

Some economists now expect Russia's annual growth to reach just two percent this year after shooting up by 4.9 percent in annual terms in the first half of 2012.

Analysts said the bank was now unlikely to follow through with a second interest rate hike before the end of the year that had been partially expected in the past weeks.

"Its statement has become more dovish, and so we do not expect the CBR to hike rates any time soon," VTB Capital said in a research note.

But economists also noted that Russia had little room to maneuver next year since continued investment capital outflows and inflationary pressures would limit its ability to cut rates.

"Combined with the persistent threat of capital outflows, and the fact that interest rates are already negative in real terms, this will limit the room for monetary easing in the face of sluggish growth," said the London-based Capital Economics consultancy.

"Weve pencilled in a 25 basis points (0.25 percent) cut in all three policy rates in 2013.

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