Russian central bank holds rates, says tight policy to continue

By Katya Golubkova and Alexander Winning

MOSCOW (Reuters) - The Russian central bank left its main lending rate at 11 percent on Friday as expected, but its rhetoric about the need to maintain tight monetary policy was more hawkish than many analysts had expected.

Its cautious position underscores the continuing risks facing an economy battered by the precipitous decline in oil prices, although matters appear less bleak than they did at the time of the previous rates meeting in January, when the bank had warned it might need to raise rates to battle inflation.

Commenting on the latest rates decision, the bank's governor Elvira Nabiullina said it was too soon to call the all-clear.

"The situation in the Russian economy has improved: inflation has fallen, the economic decline has slowed down, the rouble has strengthened," she said.

"However, as before there is high uncertainty about the future dynamics of oil prices and other external conditions. In this situation it would be most correct not to make abrupt moves."

Analysts had predicted no change in rates given the bank's tough anti-inflation rhetoric. But most had also expected the bank to soften its rhetoric by floating the possibility of rate cuts in the near future.

That rhetoric remained relatively tough however, giving few grounds to expect imminent rate cuts.

"To enable the accomplishment of inflation targets, the Bank of Russia may conduct its moderately tight monetary policy for a more prolonged time than previously planned," it said in a statement.

MISSING WORDS

Absent was a phrase inserted at the time of its last meeting in January, which had warned that "the Bank of Russia cannot rule out a tightening of its monetary policy".

But contrary to the expectations of some analysts, the bank did not reintroduce a phrase - removed in January - holding out the prospect of a rate cut at a forthcoming meeting.

"It kept the wording of its accompanying statement extremely tight – more hawkish than we had expected," Alfa Bank economist Natalia Orlova said in a note.

She concluded that a rate cut was off the table at the next meeting, in April, as well.

VTB Capital economist Alexander Isakov called the bank's move "tough", but said the statement about continued tight policy didn't necessarily mean it wouldn't cut rates next month.

He said much would depend on the outcome of discussions about the federal budget, with the central bank more likely to cut rates if the government comes up with spending cuts.

Nabiullina, who called a balanced budget policy "essential", hinted that moves to improve government finances would provide more room for lower interest rates.

"More conservative fiscal policy allows for softer monetary policy, and vice versa," she said.

She also did not rule out rate cuts, despite the monetary policy stance.

"Moderately tight monetary policy doesn't necessarily mean an increase and doesn't necessarily mean the holding of rates," she said.

"If actual inflation falls quickly, then a moderately tight monetary policy may remain even with some reduction of rates."

INFLATION RISKS

In its statement, the bank was more positive about economic conditions than at the last meeting, but warned of continuing risks.

"Despite certain stabilization in financial and commodity markets and a slowdown in inflation, inflation risks remain high," the bank said.

It nevertheless said inflation was expected to continue on a downward trend, falling below 6 percent by March 2017 and reaching the bank's 4 percent target by the end of 2017.

There might be a temporary pick-up in inflation in mid-2016, because of a low base effect, it warned.

There were also risks inflation might miss the end-2017 target, it said, citing unstable global oil and food prices and uncertainties about regulated prices in Russia and the state of the federal budget.

The bank predicted the economy would contract by 1.3-1.5 percent in 2016. But it also said the weaker rouble was helping several sectors and softening the blow of low commodity prices.

"Macroeconomic fundamentals ... suggest a less severe downturn than previously estimated considering this level of oil prices," it said.

(This story has been corrected to fix quote attribution in 13th paragraph)

(Additional reporting by Elena Fabrichnaya, Oksana Kobzeva, Lidia Kelly and Kira Zavyalova; Writing by Jason Bush; Editing by Christian Lowe)

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