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More bear than bull: Russian central bank remains cautious

Russia's central bank held interest rates steady at 11 percent on Friday, in line with expectations, although it signaled that if inflation kept on falling it would cut soon.

The bank said in a statement that while it "sees the positive processes of inflation slowdown and inflation expectations decline, as well as shifts in the economy which anticipate the beginning of its recovery growth. At the same time, inflation risks remain elevated."

It said that these risks primarily stem from slowly declining inflation expectations against the target, uncertainty in parameters of the national budget, and ambiguity of the observed movements in nominal wages.

"Moving forward, should inflation risks fall as much as to ensure with greater certainty that the Bank of Russia achieves its inflation target, the Bank of Russia will resume a gradual lowering of its key rate at one of its forthcoming Board meetings," the central bank said in a statement.

"The Bank of Russia predicts, consistent with the decision, the annual inflation to stand at about 5 percent in April 2017, to reach the 4 percent target in late 2017."

The bank was widely expected to hold interest rates at 11 percent but analysts said ahead of the decision that in the next few months the bank could start to cut rates.

Last month, the bank held rates steady, warning that inflation risks remained "high" and that the then oil price rise could be "unsustainable." However, the decision came at a time of renewed hope for Russia's beleaguered economy and the country's oil industry with commodity prices showing tentative signs of recovery.

Elvira Nabiullina and Vladimir Putin
NATALIA KOLESNIKOVA/AFP/Getty Images
Elvira Nabiullina and Vladimir Putin

That tentative bounceback has continued in April, despite hopes of an oil output cut by major producers being dashed when OPEC and non-OPEC producers failed to come to a deal on a production freeze earlier in the month.

The central Bank of Russia last month assumed in its baseline scenario of an average oil price of $30 per barrel in 2016 and forecast a gradual rise to $40 per barrel to 2018, well below the current price of $48.28 a barrel of Brent crude and $46.21 for West Texas Intermediate (WTI).

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The central bank and its governor, Elvira Nabiullina, have come under pressure from politicians who would like to see the bank cut rates more aggressively in order to stimulate growth but concern over Russia's inflation rate has taken precedence in recent months.

The rate is falling, however, and was last seen at 7.3 percent in March although it still has some way to go before it reaches the bank's 2017 target of 4 percent. As such, the bank is still expected to err on the side of caution on Friday.

On Friday, the central bank noted that inflation had fallen "perceptibly" but that the trend "bears risks of instability."

"Moving forward, should inflation risks fall as much as to ensure with greater certainty that the Bank of Russia achieves its inflation target, the Bank of Russia will resume a gradual lowering of its key rate at one of its forthcoming Board meetings."

Kirill Yankovskiy, director of Equity Sales at Otkritie Capital, told CNBC on Friday that he believed the bank would stand pat on rates, although a rate cut could be "beneficial."

"A rate cut would definitely be beneficial as a sign of confidence for the most part but I think that the general standpoint at this time is that they're not going to cut. They will probably be waiting to see more on the macro side before they make that step."

Still, he believed the bank deserved credit for its strategy so far. "Credit has to be given to the central bank of Russia for tackling the situation quite well over the last recent financial crisis in Russia. They've managed to keep the political agenda on the side and offer the (financial) system stability so I think they've done extremely well," Yankovskiy told CNBC Europe's "Squawk Box."

"I think we're coming towards a current decision (to reduce rates), it's nine months that they haven't changed the rates and I think that they definitely have a priority internally which is inflation, they have mentioned that numerous times as one of the key factors they're looking at."

"Generally, they're definitely making their own personal decisions which is most important for the central bank," he added.

Peter Kinsella, head of Emerging Market Economic & FX Research at Commerzbank, also told CNBC on Friday that he thought the bank would hold rates today and that inflation was still key.

"I think it's rather likely that we're going to see a rate-cutting cycle start or begin but it's a little bit early at this stage to see one. What they'll (the central bank) will want to see in my view is consecutive declines in inflation – they've already seen that since the beginning of the year which is good…but I think they'll need to see a little bit more further inflation declines before they cut rates."

He believed there was room for the bank to be "fairly aggressive" once it started to cut rates.

"There's definitely about 200 basis points worth of cuts that they can do, but in my view it will be rather more of a back-loaded cycle so more of a 2017 story than a 2016 one," he said.

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