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Europe, Forex

Russia trims key rate to 7.25%, says more cuts on way

* Central bank cuts rate from 7.50%

* Cites lower inflation

* Rouble shows muted reaction

* Analysts: Next rate cut possible in September (Adds detail, analyst comments)

By Andrey Ostroukh

MOSCOW, July 26 (Reuters) – The Russian central bank trimmed its key interest rate to 7.25% on Friday, as expected, and said more cuts were likely later this year amid slowing inflation.

Russia needs lower rates as cheaper lending could rekindle its now sluggish economic growth. As inflation is now slowing towards the 4% target and hovers well below double-digit readings seen a few years ago, the central bank has room to reduce rates further.

Friday’s cut became the second this year and was in line with market expectations. Twenty-three analysts and economists who took part in a Reuters poll unanimously predicted that the central bank would trim the rate to 7.25% from 7.50% at Friday’s meeting.

“If the situation develops in line with the baseline forecast, the Bank of Russia admits the possibility of further key rate reduction at one of the upcoming Board of Directors’ meetings,” the central bank said in a statement.

The latest move puts the rate back at a level where it was before a hike in September last year, something the central bank said was possible due to abating inflationary pressure.

That, it said, should help it hit its inflation target of 4% in early 2020. Consumer inflation slowed to 4.6% as of July 22.

“Weak economic activity, along with temporary factors, limits inflation risks over the short-term horizon,” the central bank said.

Elvira Nabiullina, governor of the central bank, cemented market expectations of more rate cuts this year when she said in an interview with Reuters earlier in July that the bank would like to complete the rate-cutting cycle by mid-2020, trimming the key rate in small steps.

The next 25 basis point rate cut is now possible in September but further easing would depend on inflation and economic growth as well as other risks, said Dmitry Polevoy, chief economist at Russian Direct Investment Fund.

“As the CBR has always been stressing, ‘undercutting & catching up’ would be safer for the economy and policy credibility than ‘overcutting and then being forced to reverse’,” Polevoy said.

ING analysts said they saw scope for one more 25 basis point cut in September and do not rule out another cut in December.

“We expect an additional 75 basis points of cuts over the next 9-12 months,” the Capital Economics research firm said.

The rouble showed a muted reaction to Friday’s rate decision, which was considered as interim because it was not followed by a news conference by Nabiullina.

The next rate-setting meeting on Sept. 6 will be followed by a news conference at which Nabiullina will explain the central bank’s monetary policy more. (Additional reporting by Elena Fabrichnaya, Maria Kiselyova and Katya Golubkova Writing by Andrey Ostroukh Editing by Andrew Osborn and Mark Heinrich)

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