UPDATE 2-Russian central bank move to spur lending better than rate cuts - EconMin
* Central bank to launch medium-term refinancing auctions
* Cost of 12 month funds 5.75 pct, 25 bps above repo rate
* VTB estimates will reduce cost of borrowing by 100 bps
(Updates with details, background, comments)
YUZHNO-SAKHALINSK, Russia, July 16 (Reuters) - The Russian central bank's move to cut the cost of long-term funding for banks to spur lending should do more to shore up the slowing economy than cutting interest rates, the Economy Minister said on Tuesday.
The central bank, under pressure from the Kremlin to boost credit flows to the economy, which is growing at its slowest pace in four years, kept interest rates on hold last Friday but announced it would launch auctions for one-year loans secured against non-market assets and guarantees.
By making available long-term funding at a relatively modest premium to its short-term rates, the central bank hopes to flatten the interest-rate curve and boost the so-called transmission of its policy rates to the real economy in Russia.
The initiative was the first under new central bank chief Elvira Nabiullina, a former economic aide to President Vladimir Putin.
The facility, which could slice more than a percentage point off the cost of funds, has drawn comparisons with the Long-Term Refinancing Facility set up by the European Central Bank to deal with a liquidity crunch at euro-zone banks.
Economy Minister Alexei Ulyukayev, a former central banker who recently moved into government, likened the facility to quantitative easing, seen at central banks such as the U.S. Federal Reserve to lower long-term interest rates although the Russian facility does not involve an asset purchase programme.
"I think it was an absolutely right decision," Ulyukayev told reporters on a trip to Russia's far east. "This is a form of quantitative easing, which is more efficient right now than easing of policy by lowering interest rates."
The new facility has been praised by economists, with Rosbank's Vladimir Kolychev saying Nabiullina was "rolling out the big bazooka".
Russia's economy has been hit by weaker investment and exports, but is expected to pick up later in the year thanks to stronger budget spending. The government expects growth to slow to 2.4 percent this year, from 3.4 percent in 2012.
The rouble has weakened by 3 percent against the dollar since Chairman Ben Bernanke signalled on May 22 that the U.S. Federal Reserve could wind down its monetary stimulus, boosting the dollar and hitting emerging market currencies.
However, unlike other emerging economies such as India, which hiked rates on Monday after the rupee hit a record low, Russia is prepared to tolerate a weaker currency, which would boost the rouble value of energy export revenues and make it easier to hit budget targets.
Russia's central bank will launch on July 29 the first auction for loans secured against non-market assets and guarantees, for 12 months with a floating rate initially set at 5.75 percent with 500 billion roubles ($15.3 billion) on offer.
That represents a premium of just 25 basis points to the central bank's benchmark one-day minimum auction repo rate - which the central bank held steady last week for a 10th month.
The bank signalled that it was also ready to ease policy in future. Analysts, however, agree that the new loan facility would have a bigger impact than cutting short-term rates, while eliminating funding risks in a banking sector that is prone to liquidity shortages.
"The ability to borrow at the new facility will put downward pressure on banks' deposit and lending rates," VTB Capital analysts said in a note.
"The total effect could easily reach 100 basis points, thus providing a much-needed stimulus for the economy".
The central bank move could bring overnight lending rates, currently above 6 percent closer to the middle of the policy rates corridor of 5.5 percent, Rosbank estimated.
The new one-year facility would be 175 basis points cheaper than the central bank's current standing facility, which is likely to bring "significant demand" for this source of funding, Rosbank's team of economists added in a note.
Wide net interest margins collected by Russia's state-dominated banking sector have kept the cost of credit high, but the prospect of easier funding conditions has already led state-controlled market leader Sberbank to cut loan rates.
Sberbank, acting to defend its share of a slowing market, will cut interest rates on consumer loans by 2-4 percentage points, to 16.5-22.5 percent, in a promotion that runs to the end of September. ($1 = 32.6402 Russian roubles)
(Reporting by Denis Dyomkin; Writing by Maya Dyakina; Editing by Douglas Busvine and Susan Fenton)