UPDATE: Russian central bank cuts key rate to 9% from 9.25%

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MOSCOW, Jun 16 (PRIME) -- The Russian central bank has reduced the key rate to 9.00% from 9.25% as inflation has remained close to the target level, inflation expectations are falling, economic activity is recovering although some medium-term inflation risks remain, the authority said in a report Friday.

The central bank said it needs to retain a moderately strong credit policy in order to keep inflation close to the target but sees room for a further key rate reduction in July–December.

Inflation stood at 4.1% annually in May. “Low inflation is gradually becoming stable. The price growth rates are becoming increasingly uniform across regions and the key groups of goods and services.”

Food inflation remains relatively low despite rising vegetable prices as producers have almost run out of stock from the last harvest. This factor made inflation edge up to 4.2% as of Tuesday, which may put a temporary stop to falling inflation expectations.

Households continue to follow a savings-based model of consumption, while consumer activity has somewhat recovered. Consumer loans are posing no inflation threats.

The ruble rate is stable, and its influence on inflation has decreased.

The short-term inflation risks, connected with the oil price dynamics have diminished after OPEC and non-OPEC oil producers prolonged their output reduction deal.

Medium-term risks have remained high as oil prices are still lower than expected. There is also a rising structural deficit of skilled workforce in Russia, which is why salary growth can exceed labor productivity. A possible change of the consumption model to a spending-focused one can destabilize inflation. Inflation expectations are sensitive to changes in prices for some products and the ruble rate. Possible tax changes can accelerate inflation temporarily.

The economic activity is restoring as investments and industrial production are increasing, and the consumption by households is growing.

Taking these trends into account, the central bank has increased its 2017 gross domestic product growth forecast to 1.3–1.8%. In the future, only structural changes of the economy can push the growth rate beyond 1.5–2.0%.

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