Russia's central bank held its benchmark refinancing rate steady at 8.25 percent but cautioned that inflation is expected to remain above its target in the first half of 2013 and this poses risks.
The Bank of Russia, which raised its rate by 25 basis points in 2012 and is facing pressure to cut rates in light of declining economic growth, said the rise in January's inflation rate to 7.1 percent from 6.6 percent in December was mainly due to higher prices for food and passenger transport while non-food goods inflation remained moderate.
But the inflation rate may stay above the bank's 5-6 percent target in the first half of 2013 and "taking into account the effect on economic agents' expectations, the inflation rate staying above the target range for a prolonged period poses inflation risks," the bank said after a meeting of its board.
In early 2011 Russia's inflation rate was above 9 percent but then gradually started declining in the second half of the year for an annual average of 8.4 percent as the central bank raised its rates. But inflation then started accelerating in mid-2012 and in September the Bank of Russia raised its rate to keep inflation from rising further.
With growth declining - third quarter Gross Domestic Product rose only 0.6 percent from the second quarter for annual growth of 2.9 percent - the central bank is facing pressure to cut rates. Last month the bank's chairman, Sergei Ignatyev, rebuffed Russian President Vladimir Putin, saying interest rates would first come down when inflation falls. Ignatyev is retiring in June.
Russia's economy is estimated to have expanded by 3.4 percent, down from 2011's 4.3 percent.
The Bank of Russia said industrial production remained subdued in December and investment in new production capacity continued to decelerate but capacity utilization in industry remains relatively high and economic confidence is positive. The labour market and credit expansion supports domestic demand and gross output "remains close to its potential level," the bank said.
"Taking into account still relatively high bank lending growth rates, the risks of a significant economic slowdown stemming from tighter monetary conditions are considered minor," the bank said, adding it would continue to monitor the risks to inflation and economic growth, "including those stemming from the monetary conditions tightening."
The Bank of Russia also said it was introducing "single required reserve ratio on all categories of credit institutions' liabilities of 4.25%," as the necessity to use the ratio for capital flows regulation has decreased significantly.
The new reserve ratio will be applied on banks for the reporting period March 1-April 1 and the bank said the introduction of the ratio was "neutral from the viewpoint of its influence on the banking sector and the current monetary policy stance."