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UPDATE 2-Russia cbank holds rates but frets over inflation

* Central bank leaves all policy rates unchanged

* Cbank concerned about core inflation, plays down economic growth risks

* Non-committal comments leave future options open

(Adds context, analyst comments)

By Jason Bush and Maya Dyakina

MOSCOW, Oct 5 (Reuters) - Russia's central bank kept key interest rates unchanged at its monthly policy meeting on Friday, but future rate hikes remain likely given the bank's emphasis on inflationary risks.

The decision was widely expected, just three weeks after the central bank hiked all its rates by 25 basis points to crack down on inflation.

The bank said, however, that consumer price inflation continues to increase, reaching 6.6 percent annually in September and exceeding the central bank's 5-6 percent target.

It also said that while the rise in inflation was mainly the result of higher food prices and an increase in regulated utility prices, a continuing rise in core inflation showed that inflation processes are spreading.

"The statement was relatively hawkish," said Clemens Grafe, chief Russia economist at Goldman Sachs.

"What was interesting is the confirmation that they see the risks of inflation higher than the risks to growth."

The decision means that the fixed one-day repo rate, a de facto ceiling for the money market, was left unchanged at 6.5 percent, and the overnight deposit rate, a floor for interbank rates, at 4.25 percent.

The refinancing rate, the cost of overnight loans from the central bank, was held at 8.25 percent.

Kirill Tremasov, economist at Nomos Bank, said it was important for the bank to sit back and see what impact its earlier moves were having.

Many analysts nevertheless believe that the central bank will resume increases in interest rates before the end of the year, reflecting its determination to polish its anti-inflationary credentials.

The rouble firmed slightly on the news because further rate hikes would increase the attractiveness of the carry trade, or investing in Russian assets funded by cheap foreign borrowing.

INFLATION RISKS

In recent weeks the central bank has emphasised its concerns about rising inflation, while largely playing down concerns about a slowing economy.

First Deputy Chairman Alexei Ulyukayev said this week he viewed inflation risks as greater than those of an economic slowdown. Friday's central bank statement reiterated the same hawkish message, but left its options open.

Official data on Thursday showed that the annual rate of core inflation - which strips out volatile items like food - was 5.7 percent in September, up from 5.5 percent in August.

However, the central bank saw little evidence of significant inflation pressure from the demand side, suggesting it is still in two minds about the need for further interest rate hikes.

The central bank's emphasis on continuing inflation risks nevertheless contrasted with its largely dismissive attitude to recent evidence of a slowing economy.

It said that despite some signs of a slowdown in August and a stabilisation in bank lending growth the stable state of the labour market and rising consumer credit would support domestic demand, keeping total output close to its potential.

In particular, the central bank played down concerns that tighter monetary conditions were a threat to economic growth - an implicit defence of its recent rate hikes.

"I don't think they are convinced that there is really much of a slowdown, because there are a lot of indicators that point in a different direction," said Grafe from Goldman Sachs.

Russia's gross domestic product grew by 2.8 percent annually in August, a slowdown from the 4.0 percent growth seen in the second quarter.

Recent data on retail sales, investment and industry output also suggest that Russia's economy lost steam over the summer. Yet business surveys in September pointed to a surprisingly strong pick-up in activity, suggesting data may turn more upbeat in the coming weeks.

"As a whole we think that the hawkish mood (of the central bank) remains, and we expect that there will be another 25 basis point rise by the end of the year," said Vladimir Tsibanov, economist at Rosbank. "But it will most probably happen after we have a stabilisation in the domestic demand indicators."

(Reporting by Jason Bush and Maya Dyakina; Editing by Douglas Busvine and Jeremy Gaunt)

((jason.bush@thomsonreuters.com)(Tel: +7 495 775 1242))

Keywords: RUSSIA RATES/