Russia's central bank held its policy rate steady but once again cut some of its long-term rates by 25 basis points, saying there "remain risks of further economic slowdown given the weak investment activity and the sluggish recovery in external demand."
Although inflation is still above the Bank of Russia's target and this may affect inflationary expectations if it remains high for "a prolonged period," the central bank said it still forecasts that inflation will return to the target range in the second half of 2013.
At its previous meeting in May, the central bank also noted the risk of economic slowdown and its expectation that inflation would return to its target in the second half of the year.
Russia's central bank last cut its policy rate by 25 basis points in September 2012 to 8.25 percent but has been cutting long-term rates in recent months to bring the cost of obtaining liquidity from the central bank closer to the main rates and strengthen the bank's transmission mechanism.
On the central bank's standing facilities, the REPO rate for up to 12 month loans was cut to 7.25 percent, on loans secured by gold the rate was cut to 7.25 percent for loans from 181-365 days, and on loans secured by non-marketable assets and guarantees, the rate on loans form 181-365 days was cut to 7.50 percent. The rate for 12 months open market operations was cut to 7.25 from 7.50 percent.
Last week Bank of Russia Governor Sergei Ignatyev, who retires later this month, said today's policy decision was going to be very difficult given the rise in inflation while the economy remains weak.
Russia's headline inflation rate rose to 7.4 percent in May from 7.2 percent in April, continuing its rise since hitting a recent low of 3.6 percent in May 2012, and well above the central bank's 5-6 percent range. Core inflation in May was 5.9 percent.
The central bank said the rise was mainly due to higher prices of food and certain regulated prices and tariffs and noted that there were planned increases in the tariffs of certain natural monopolies.
Russia's economy slowed down last year with growth slowing to an estimated 3.4 percent from 4.3 percent in 2011 and the central bank said that indicators point to continued low growth.
"The growth rates of industrial production remain subdued, investment in production capacity continues to decrease," while consumers have been resilient, and labor and credit markets still provide support to domestic demand.
Ignatyev, who has been central bank governor since 2002, will be handing over the reins of the bank to Elvira Nabiullina, aide to President Vladimir Putin, later this month.
Last week he also noted that the continued outflow of capital from Russia has heavily impacted the depreciation of the ruble, which has complicated the central bank's efforts to reduce inflation.
Earlier this year he said some 2.5 percent of national income, or $49 billion, illegally left Russia last year.
Since May, the ruble has lost another 3.5 percent against the U.S. dollar, just as most other emerging market currencies on fears of reduced global liquidity from the U.S. Federal Reserve's tapering of asset purchases. This year the ruble has lost 5.6 percent and was trading around 32.3 to the U.S. dollar today.