April 19, 2018 / 12:29 PM / 10 months ago

UPDATE 1-Russia c.bank says geopolitics limits room for rate cut

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MOSCOW, April 19 (Reuters) - The Bank of Russia could keep its key rate higher than previously thought if increased risks relating to new U.S. sanctions remain, analysts at the central bank said on Thursday.

Volatility on Russian markets has soared since the United States hit Moscow with fresh sanctions on April 6, targeting some of Russia’s biggest companies and most prominent businessmen to punish the Kremlin for its alleged meddling in the 2016 U.S. election and other “malign activity”.

In a monthly report on economic trends, analysts at the central bank said heightened geopolitical tensions had led to increased volatility but did not threaten market stability.

“The Russian risk premium increased in the last month by almost 50 basis points. If this change proves to be persistent, the key rate level envisaged by neutral monetary policy will be higher,” the central bank’s analysts said in a monthly report on economic trends.

The central bank, which will hold its next board meeting on rates on April 27, has previously said it plans to lower its key rate to a “neutral” range of between 6-7 percent this year, down from a current level of 7.25 percent.

The analysts said inflationary risks had increased in April, in part because of geopolitical tensions, but also due to a sharp weakening of the rouble, higher wage growth and uncertainty about future tax policies in Russia.

Inflation is likely to be the first economic indicator to feel the impact of the sell-off in Russian markets, triggered by the latest wave of sanctions that could also cap an economic recovery this year.

Russian real wages increased 6.5 percent year-on-year in March and the rouble has lost more than 5 percent against the dollar since the new sanctions were imposed.

A weakening of the rouble by between 5-10 percent could add up to 1 percentage point to inflation in the next 6-12 months, the central bank analysts said.

But they said inflation was only seen rising towards the central bank’s target of 4 percent in the second half of the year. Russian annual inflation totalled 2.4 percent in March.

Reporting by Jack Stubbs, Polina Nikolskaya and Elena Fabrichnaya; Editing by Andrey Ostroukh and Richard Balmforth

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