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Russian bank warns of high inflation

Moscow - Russia's central bank said on Wednesday economic growth would "most probably" fall below 1% in 2014 and it was also concerned about above-target inflation that constrains its ability to cut interest rates.

Despite the economic slowdown, central bank governor Elvira Nabiullina said the bank did not plan to cut its key lending rate from 7% until its June meeting at the earliest.

The combination of stagnating growth and high inflation underscores the debilitating impact that international tensions around Ukraine are having on Russia's poor economic health.

It also highlights the dilemmas the central bank faces as it struggles to reassure markets by stabilising the rouble - contradicting its long-term policy goal of letting the exchange rate find its own level.

Nabiullina told a Moscow banking conference that the bank's previous 2014 growth forecast in the range of 1.5-1.8% was now unlikely to be met.

"More probable is a reduction in the growth rate to a level below 1%," she said.

Growth forecast

The bank is just the latest organisation to slash its growth forecast, as the deterioration of East-West relations provoked by the Ukraine crisis exacerbates a slump in investment and an outflow of capital.

Economists polled by Reuters last week cut their average 2014 growth forecast to 0.8% from 1.9%.

The central bank raised its key lending rate to 7% from 5.5% a month ago to protect the rouble when markets took a pounding on the first day of trading after President Vladimir Putin declared Russia's right to invade Ukraine.

Nabiullina said the rate would remain in place at least until June: "A signal was given at the March 14 board of directors' meeting that (the rate) will not be reduced during the coming months - at the very least until the June meeting."

The bank's next meetings to discuss monetary policy are scheduled for April 25 and June 16.

Nabiullina said rate cuts were not on the immediate agenda because of the bank's "serious concern" over high inflation, which she said was currently running at an annual rate of 6.64%.

"We expect to succeed in stabilising inflation in the second half of the year, but all the same the risks that it will remain above the target rate of 5% this year are high," she said.

Nabiullina said the bank will be acting to stabilise the currency in the short-term, putting off plans announced earlier this year for a floating exchange rate.

"In connection with the high uncertainty, at the moment we are preserving the parameters of the exchange rate policy mechanism at levels needed to prevent excessive fluctuations of the currency," she said.

"But after the stabilisation of the situation we will continue the gradual transition to a floating exchange rate."

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