The Russian central bank (CB) trimmed its key interest rate to 7.25%, as expected, and said more cuts were likely later this year amid slowing inflation.

Russia needs lower rates as cheaper lending could rekindle its now sluggish economic growth. As inflation is now slowing towards the 4% target and hovers well below double-digit readings seen a few years ago, the central bank has room to reduce rates further.

Friday’s cut became the second this year and was in line with market expectations. Twenty-three analysts and economists who took part in a Reuters poll unanimously predicted that the central bank would trim the rate to 7.25% from 7.50% at Friday’s meeting.

“If the situation develops in line with the baseline forecast, the Bank of Russia admits the possibility of further key rate reduction at one of the upcoming Board of Directors’ meetings,” the central bank said in a statement.

The latest move puts the rate back at a level where it was before a hike in September last year, something the central bank said was possible due to abating inflationary pressure.

That, it said, should help it hit its inflation target of 4% in early 2020. Consumer inflation slowed to 4.6% as of July 22.

“Weak economic activity, along with temporary factors, limits inflation risks over the short-term horizon,” the central bank said.

Elvira Nabiullina, governor of the central bank, cemented market expectations of more rate cuts this year when she said in an interview with Reuters earlier in July that the bank would like to complete the rate-cutting cycle by mid-2020, trimming the key rate in small steps.

The next 25 basis point rate cut is now possible in September but further easing would depend on inflation and economic growth as well as other risks, said Dmitry Polevoy, chief economist at Russian Direct Investment Fund.

“As the CBR has always been stressing, ‘undercutting & catching up’ would be safer for the economy and policy credibility than ‘overcutting and then being forced to reverse’,” Polevoy said.

ING analysts said they saw scope for one more 25 basis point cut in September and do not rule out another cut in December.

“We expect an additional 75 basis points of cuts over the next 9-12 months,” the Capital Economics research firm said.

The rouble showed a muted reaction to Friday’s rate decision, which was considered as interim because it was not followed by a news conference by Nabiullina.

The next rate-setting meeting on Sept. 6 will be followed by a news conference at which Nabiullina will explain the central bank’s monetary policy more.

Meanwhile, Russian Finance Minister Anton Siluanov has asked the central bank to postpone reforms requiring banks to increase capital buffers under the “Basel III” international financial rules, according to a letter seen by Reuters.

The request for the delay focuses on disagreement about how the banks’ risks are assessed, with the central bank saying it will do in-house assessment and the finance ministry arguing it should be based on ratings by domestic agencies.

Siluanov’s request, which had not been previously reported, comes at a time of broader tension between the Russian government and central bank over the banking sector and tools for aiding economic growth.

The central bank’s priority is stability of the financial system, but ministers are worried that economic growth — and households’ real disposable incomes — is stagnating, hitting the Russian leadership’s ratings.

Some ministers have been pressing the central bank to change the way it supervises banks to encourage more lending which will in turn contribute to growth.

The move to increase banks’ capital buffers - part of the Basel III rules developed after the financial crisis of 2008-09 - is likely to have the effect of holding down lending, the chief executive of Russia’s second bank has said.

In the letter dated July 17, Siluanov wrote to central bank governor Elvira Nabiullina saying the introduction of the higher capital buffers in line with the Basel III changes should be tied to the introduction of domestic ratings for the banks.

“We have in mind a postponement of the increase in additions to the requirements of the banks’ capital adequacy,” Siluanov wrote.

Under the central bank’s proposals, banks are already increasing capital buffers as part of the Basel III process and should fully comply during the next couple of years.

No government officials have said how long it would take before domestic ratings can be used as the basis for Basel III changes.

A Finance Ministry source, speaking on condition of anonymity because he was not allowed to discuss non-public correspondence, confirmed the authenticity of the letter.

Reuters