UPDATE 1-Russian central bank signals rate cut with an eye on U.S. Fed

The Russian central bank sent a clear signal on Monday that it would cut interest rates soon, saying that expected monetary easing by the U.S. Federal Reserve should justify rate cuts in Russia. Alexei Zabotkin, head of the monetary policy department at the Russian central bank, said the Fed is expected to cut U.S. borrowing costs twice in the first half of 2020.

"This gives an extra space for monetary policy easing in emerging market countries and in Russia in particular," Zabotkin told a monetary policy meeting in Russia's lower house of parliament. Zabotkin also said that slowing inflation means the Russian central bank is considering a rate cut "in the near future".

The bank is gradually cutting rates as it normalises policy after economic and financial shocks caused by Western sanctions on Russia, and as inflation, its key area of responsibility, has slowed to its 4% target. If the key rate is cut from its current level of 7%, it will dive below that mark for the first time since March 2014 and into the 6-7% range that the central bank deems neutral.

Zabotkin said it was too early to revise the neutral range but it was possible in the future. Zabotkin's comments echoed those of his boss, central bank governor Elvira Nabiullina, who said last week that the bank could now cut rates faster than previously thought.

Nabiullina's comments moved the market last week, boosting prices of government bonds that move inversely with yields. Investors are keen to buy into Russian debt before rates fall, possibly as soon as central bank meetings due on Oct. 25 and Dec. 13.

The Federal Reserve will hold its own rate-setting meeting on Oct. 30. It has cut U.S. interest rates twice in 2019 and expectations of further reductions in 2020 prompted Zabotkin to hint at easier monetary policy at home, which he said will help accelerate lending activity in Russia. The Russian central bank has cut rates three times so far this year as the Russian economy was battling sluggish economic growth and gloomy forecasts.

First Deputy Governor Ksenia Yudayeva also said on Monday there was scope for rate cuts at a faster pace than the central bank had previously expected.

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