Russian Central Bank leaves rates on hold

Moscow - The Russian central bank left its key interest rate on hold at a regular meeting on Friday, arguing that inflation is still on track to hit its medium-term target even though it is set to remain above 7% this year.

The uncharacteristically dovish stance suggests the bank is reacting to concerns about ebbing economic growth as Western sanctions over the Ukraine crisis bite.

The decision keeps the bank's central policy rate, the one-week minimum auction repo rate, at 8%, and was broadly expected.

In an accompanying statement, the bank said inflation this year was likely to exceed 7% because of an "aggravation of geopolitical tensions, the imposition of external trade restrictions and the impact of these developments on the rouble exchange rate dynamics".

The bank has in effect abandoned this year's official inflation target of 5% , as well as a wider range of 3.5-6.5% allowed under the bank's rules, following a sweeping ban on food imports imposed in retaliation for Western sanctions.

It is instead emphasising its medium-term inflation target of 4%. The "current monetary policy stance will ensure decline in consumer price growth to 4% in the medium run", the bank said.

Under current plans the bank aims to reach the 4% medium-term target in 2016. The bank said it stood ready to raise rates again if inflation expectations remained high, jeopardising this medium-term goal.

The bank also said that "economic activity remains weak" and economic growth "anaemic". It attributed this mainly to structural factors lowering output potential, but also anticipated a small shortfall in demand below the economy's potential, which would help lower inflation.

The bank acknowledged that Western sanctions were harming economic growth, but anticipated a gradual recovery next year as the external political situation normalises.

"In the second half of 2014 further slowdown in economic growth is expected amid the imposition of sanctions against Russian companies and the remaining uncertainty," the bank said.

It projected gross domestic product growth at 0.4% this year and 0.9-1.1% in 2015.