Oct. 6 (Bloomberg) -- Russia’s central bank may reduce its key interest rate this month to a record low as the prospect of a sluggish recovery in the commodity-reliant economy keeps a lid on price pressure, a survey showed.

Bank Rossii may lower the refinancing rate for an eighth time since April, cutting it by a quarter point to 9.75 percent before the end of October, according to the median estimate of 14 economists surveyed by Bloomberg. The rate may fall to 9.5 percent by the end of the year, the survey showed. The bank, which doesn’t publish a timetable for rate meetings, began cutting on April 24 for the first time since 2007.

A record economic contraction may bring the inflation rate this year below the government’s target for the second time in a decade, marking the end of an era that saw inflation exceed 14 percent a year since the 1998 default. As prices slow, the central bank will continue rate cuts to help output recover from a 10.9 percent slump in the second quarter, economists said.

“The central bank’s aggressive interest-rate cuts reflect its increased confidence in controlling inflation,” said Nikolai Podguzov, a fixed-income analyst at Renaissance Capital in Moscow.

Russia’s inflation rate last month fell to its slowest pace in two years, dropping to 10.7 percent from 11.6 percent in August, the Federal Statistics Service said today. From August, consumer prices were unchanged for a second month.

Disinflationary Environment

“The existing disinflationary environment keeps doors wide open for further monetary easing,” said Vladimir Osakovsky, an economist at UniCredit SpA in Moscow. “The economy needs a much weaker ruble and much lower interest rates.”

Bank Rossii Chairman Sergey Ignatiev said last week slower inflation will allow the bank to continue cutting rates, adding that consumer-price growth this year may be “considerably lower” than 11 percent, while the rate in 2010 may be below the government’s official forecast for 9 percent to 10 percent.

The Economy Ministry expects the inflation rate to range from 11.6 percent to 12 percent in 2009 from last year’s 13.3 percent.

The bank still uses policy to steer the ruble and won’t move to a fixed inflation target until 2011. With ruble swings still tracking shifts in the price of oil, the bank says it won’t abandon foreign-currency interventions in the “next few years,” though it will buy and sell currency only to “smooth out” the ruble’s volatility.

Ruble Transactions

Bank Rossii probably bought $700 million of foreign currency on the market today as the ruble jumped the most in two weeks, according to analysts including Kirill Grishanov, head of foreign-currency trading at ZAO Promsvyazbank, and Alexey Borichev, head of foreign- currency trading at ING Groep NV in Moscow.

The regulator bought $2.6 billion during the last two days of September to stem the ruble’s appreciation, Ignatiev said. Moscow-based Trust Investment Bank estimates the bank’s interventions reached about $3 billion last week, the biggest sum purchased since May.

The ruble may trade around 37 against its target dollar- euro basket by the end of October and weaken to 37.40 by the end of the year, according to the median estimate in the survey.

“The ruble is close to the 30 per dollar barrier, beyond which we think significant appreciation pressure is likely to be met with intensified foreign-currency interventions,” Yaroslav Lissovolik and Georgy Kartashov, economists at Deutsche Bank AG in Moscow, wrote in a note.

Putin Objective

The ruble today gained to the strongest level against the dollar this year, adding 0.8 percent to 29.8192 per dollar at 4:42 p.m. in Moscow. It was little changed against the euro.

The movements against the dollar and the euro left the ruble at 36.1483, the strongest level since Jan. 13, against the central bank’s currency basket, which is used to manage swings that hurt Russian exporters.

The Russian currency strengthened 5.9 percent against the greenback in September for the first monthly gain since May as crude oil, Russia’s chief export, topped $67 a barrel. Crude prices have doubled since February, boosting the outlook for the world’s biggest energy exporter.

Prime Minister Vladimir Putin said on Sept. 11 that preventing the appreciation of the Russian currency remains a government objective. The Finance Ministry estimates oil prices will average $58 a barrel next year, while the ruble will weaken and reach an average rate of 33.9 per dollar.

Bank Recovery

The government expects the economy to contract 6.8 percent in the second half and 8.5 percent in 2009. Output will return to growth of 1.6 percent next year and 3 percent in 2011, the government estimates.

The outlook for growth still hinges on a recovery in the financial system and a resumption of lending growth. Credit flows have faltered even after Bank Rossii cut rates as banks remain concerned that borrowers can’t service debt and as asset quality deteriorates. Overdue bank loans rose to 5.8 percent of total lending in August from 5.5 percent a month earlier.

While lower rates have failed to revive lending because of “high credit risks,” the central bank’s cuts have prevented a more severe contraction in the banking sector, Ignatiev said last week. Russian banks may see a “breakthrough” in lending in the next two months, he said.

Corporate loan books were unchanged in August after shrinking by 0.2 percent in July, central bank data showed last week. Lending to consumers dropped 0.6 percent for the seventh consecutive monthly decline.

Russian interest rates for bank loans to companies rose last month for the first time this year, according to the central bank. Companies paid an average interest rate of 15.1 percent in August, versus 14.7 percent in July.

The higher rates on loans “could be an indication that banks have started extending credit to lower-quality borrowers,” Simon Nellis and Maria Semikhatova, analysts at Citigroup Inc., said in a report.

To contact the reporter on this story: Paul Abelsky in Moscow at pabelsky@bloomberg.net.

Last Updated: October 6, 2009 08:51 EDT