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UPDATE 1-Russia central bank analysts: key rate should be cut carefully
April 12, 2017 / 2:30 PM / in 6 months

UPDATE 1-Russia central bank analysts: key rate should be cut carefully

* Russian inflation slowing towards target

* Central bank promises policy to stay tight

* Analysts say inflation pressure could build in H2

* Tight policy makes Russia bonds attractive (Adds detail, context)

By Elena Fabrichnaya and Alexander Winning

MOSCOW, April 12 (Reuters) - Russia’s central bank should lower its main lending rate carefully in order to keep inflation close to its 4 percent target beyond this year, analysts working at the bank said in a report.

The central bank cut its key rate in March by 0.25 percentage points, the first cut since September, in response to a faster than expected slowdown in inflation.

It has kept monetary policy tight since 2014 despite a deep economic slump in an effort to bring down inflation to post-Soviet lows.

Analysts at the bank said on Wednesday that inflation could fall from 4.3 percent in March to below 4 percent in April-May but that inflation pressure in the second half of the year could make it difficult to keep inflation near 4 percent in 2018.

The analysts, whose opinions do not necessarily reflect the official position of the central bank but are seen as a good guide to its thinking, said the current balance of inflation risks allowed for a gradual reduction of the bank’s key rate.

Russia’s central bank has signalled that small rate cuts could come in the second and third quarters, though Governor Elvira Nabiullina said there could be pauses in the bank’s easing cycle.

The bank next meets on monetary policy on April 28, and analysts polled by Reuters late last month expected the key rate to be cut by 50 basis points over the second quarter of 2017.

Tight monetary policy has fed a strong rally in Russian assets, making Russian local debt an investor favourite.

“I can’t think of any other country on the planet where inflation is slowing so quickly and the central bank is so hawkish,” said Paul Greer, senior emerging market debt trader at Fidelity International in London.

“It’s a nice mix for an investor.” (Additional reporting by Sujata Rao in London; Editing by Katya Golubkova and Alison Williams)

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