Russia's central bank held its benchmark refinancing rate steady in October, as expected, saying inflation expectations had eased following its recent rate hike, certain food prices had dropped and there were few upward price pressures from demand.
The Bank of Russia, which surprised markets by raising rates in September to the current 8.25 percent, said it would continue to keep track of inflation risks and "the consequences of the monetary tightening for the Russian economy" - a statement that indicates the bank is aware that its relatively high interest rates are dampening economic growth.
The central bank's statement is less hawkish than last month when it warned that higher food prices were spreading to other segments of consumer prices.
The central bank also pointed out that the pace of inflation declined in October and early November though it still but remained above the Bank of Russia's target of 5-6 percent inflation.
Consumer prices eased to an annual rate of 6.5 percent in October from 6.6 percent in September and the central bank said inflation was estimated at a 6.4 percent rate by Nov. 6, with a stabilization of food prices, the key driver of inflation in recent months.
It added that the core inflation rate was 5.8 percent in October.
"Taking into account its influence on economic agents' expectations, the recent growth in inflation rate remains an important source of inflation risks. Nevertheless, the deceleration of certain food prices growth and the September 2012 hike in the interest rates on the Bank of Russia monetary policy instruments could contribute to the moderation of inflation expectations," the bank said in a statement after a meeting of its board of directors.
High inflation has marked Russia's economy for many years and in the first half of this year it dropped to the 3-4 percent range. But then in June it started accelerating again due to higher grain prices from bad global harvests, prompting the government to sound the alarm and the central bank to raise rates to reinforce its determination to keep inflation under control.
The central bank said indicators showed that there was a certain slowdown in economic activity in September, with investment growth continuing to decelerate while consumer demand and industrial production growth was largely unchanged. Economic confidence, however, remains positive and credit expansion robust and output remains close to its potential level.
"Banking credit growth continued to show certain signs of the stabilization. However, the risks of a significant economic slowdown stemming from somewhat tighter monetary conditions are considered minor," the Bank of Russia said.
In the second quarter, Russia's Gross Domestic Product grew by only 0.1 percent from the first quarter, down from a quarterly rise of 0.6 percent, for an annual growth rate of 4.0 percent.