Russian central bank, in surprise move, cuts key rate to 7.75 percent

MOSCOW (Reuters) - The Russian central bank cut its key interest rate by 50 basis points to 7.75 percent from 8.25 percent on Friday, a sharper cut than expected, and said further cautious reductions were possible in the first half of next year.

Friday's cut, the sixth this year, was a surprise for the market because all 22 analysts polled by Reuters expected the central bank to cut the rate by just 25 basis points to 8 percent..

The central bank said it would also consider cutting the key rate next year because inflation had slipped below its 4 percent target to 2.5 percent in annual terms as of Dec. 11.

"The Bank of Russia will continue its gradual transition from moderately tight to neutral monetary policy and holds open the prospect of some key rate reduction in the first half of 2018," the central bank said in a statement.

Inflation has slowed faster than expected this year largely thanks to booming agriculture production, a stronger rouble and the central bank's tight monetary policy.

Further rate cuts, however, are likely to be cautious and gradual as the central bank sees risks of inflation picking up again next year.

The central bank noted that the extension of an output cut agreement between oil-exporting countries lowered uncertainty on the global energy market and reduced related pro-inflationary risks over a one-year horizon.

"However, the risks of upward deviation of inflation from the forecast in the medium term still prevail," it said.

The central bank has previously said it aims to bring its key rate down to 6.5-7 percent over the next two years as a sharp slowdown in inflation leaves room for cuts.

Annual inflation in Russia is currently at an all-time low after tumbling from around 17 percent in early 2015.

The central bank said it had also confirmed its economic growth forecasts for this year at 1.7-2.2 percent.

Elvira Nabiullina, the central bank's governor, is expected to give more information about the central bank's plans and forecasts at a regular news conference due at 1200 GMT.

The rouble weakened briefly to 59.06 against the dollar after the deeper-than-expected rate cut from around 58.88 seen shortly before the rate announcement. It later recovered to trade at 58.99 as of 1038 GMT.

The next rate-setting meeting is scheduled for Feb. 9.

(Reporting by Andrey Ostroukh and Jack Stubbs; Editing by Andrew Osborn)