By Elena Fabrichnaya and Katya Golubkova
MOSCOW (Reuters) - Inflationary expectations in Russia remain high and require a restrained approach from the central bank in softening its monetary policy, First Deputy Governor Ksenia Yudayeva told Reuters.
The central bank last month cut its key interest rate to 8.5 percent from 9 percent, as inflation slowed down. In August, it was at 3.3 percent in annual terms - lower than the central bank's target of 4 percent set for the end of this year.
Speaking at the Reuters Russia Investment Summit, Yudayeva said the slowdown in inflation had allowed the central bank to cut rates faster than it had expected.
"Inflationary expectations remain high which requires restraint in softening the monetary policy," Yudayeva told the Summit in Moscow. The central bank may decide to change the rate at any board meeting this year, she said.
The central bank has been gradually cutting the rate after the spike to 17 percent at the end of 2014, when the regulator had to react to a sharp fall in the rouble.
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Yudayeva said the key for the central bank would be to make people believe that even if inflation deviates from 4 percent, it will return to the target. She did not give a specific time frame how long it would take to anchor prices.
"We know that in other countries, it took a couple of years. The more anchored inflationary expectations are, less sharp our reaction to one-off shocks can be," Yudayeva said. Her boss, the governor Elvira Nabiullina, earlier said inflation could be anchored by 2019.
POLICY NORMALISATION
As soon as inflation is stable for a certain period of time at around 4 percent, the key rate can be at a neutral level - the one posing no risk for any speed-up in inflation and which the central bank estimates at 6.5-7 percent, Yudayeva said.
"We had a period of disinflation, now we have reached the inflation target, so now our policy should normalise - i.e. move closer to the long-term equilibrium," she said.
But given that inflationary expectations are still high, cutting the rate too fast to the neutral level poses significant risks, so the central bank is lowering it step-by-step, Yudayeva said.
There is no point in changing the target as the economy should live with it for a while - the central bank may consider changing the target after expectations are anchored for a certain period of time, she added.
The central bank may also consider introducing an inflation corridor at some point, although currently this is "irrational".
Yudayeva said inflation deviation inside the corridor may send incorrect signals and lead to delayed reaction by the central bank when in fact the action was needed earlier.
"In general, the corridor does not improve understanding on how the monetary policy should work," she said.
(Additional reporting by Darya Korsunskaya, Kira Zavyalova, Dmitry Antonov, Christian Lowe, Vladimir Soldatkin, Anton Zverev, Zlata Garasyuta and Andrey Ostroukh; writing by Katya Golubkova,; editing by Jack Stubbs and Ed Osmond)