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UPDATE 2-Russia lowers key rate to 6%, says more cuts still possible in 2020

Andrey Ostroukh

* Russian central bank cuts key rate to 6.00% from 6.25%

* Cites lower inflation, shrugs off recent volatility

* Rouble weakens vs dollar after rate cut

* Economists predict more cuts in 2020 (Adds quotes, detail)

MOSCOW, Feb 7 (Reuters) - The Russian central bank lowered its key interest rate to 6.00% on Friday and said it may switch to a loose monetary policy stance later this year as inflation has slowed faster than expected.

The central bank downplayed the recent spike in market volatility related to the outbreak of a new coronavirus, cutting the cost on lending for the sixth consecutive meeting .

The 25-basis-point cut was in line with the consensus forecast in a Reuters poll. SHowever, some analysts had expected the central bank to leave rates unchanged amid increased global market volatility and risks of higher state spending under a new Russian government.

Central Bank Governor Elvira Nabiullina, presenting the rate move, said annual inflation was expected to bottom out near 2% in the first quarter and start gradually returning to the 4% target in mid-2020.

"If the situation develops in line with the baseline forecast, the Bank of Russia holds open the prospect of further key rate reduction at its upcoming meetings," the central bank said in a statement.

Nabiullina downplayed concerns that the newly appointed government could increase state spending, which would pose inflationary risks.

"We believe that budget expenditure will be more evenly distributed this year."

The rouble weakened after the move to 63.91 versus the dollar from the 63.82 seen before the cut.

Lower rates make lending cheaper and, in theory, boost economic growth. But they also deprive Russian bonds and the rouble of their high-yielding status and may prompt outflows of funds from Russian markets.

UNCHARTED TERRITORY AHEAD

The cut brought the key rate to the lower boundary of the 6% to 7% range that the central bank considers neutral from a monetary policy point of view.

Nabiullina said the central bank may revise the neutral rate in the future but it may take more than a year as the bank does not have sufficient data for this.

"If our estimate of inflation and the economic situation require, the key rate may be set beneath the lower bound of the neutral range. This will mean (a) loose monetary policy."

Dmitry Polevoy, chief economist at the Russian Direct Investment Fund, said Friday's communication was "a clear hint of CBR willingness to step into the uncharted sub-6% rates territory in its search of key rate neutrality to bring inflation back to 4% under the targeted GDP growth."

The central bank said economic growth in Russia is seen picking up to 1.5% to 2.0% in 2020 and then up to 3% in 2022, having reached 1.3% in 2019.

Citi said in a note that it expected the central bank would "execute two more cuts to 5.50% by the end of the year."

The next rate-setting meeting is scheduled for March 20. (Additional reporting by Gabrielle Tétrault-Farber, Elena Fabrichnaya; Writing by Andrey Ostroukh; editing by Larry King and Toby Chopra)