Russia's central bank on Friday unexpectedly decided to cut its key refinancing rate for the first time since 2010 and narrowed the interest rate corridor.

The key refinancing rate was lowered by a quarter point to 8 percent. Economists were expecting the bank to maintain the rate at 8.25 percent. This was the first reduction since June 2010.

At the same time, it raised the overnight deposit rate to 4 percent from 3.75 percent and left the repurchase rate unchanged at 5.25 percent.

Bank Rossii said the decision was based on the assessment of inflation risks and risks to the sustainability of economic growth. The central bank judged that the current level of money market interest as appropriate to balance the inflationary risks and the risks to economic slowdown.

The bank said the latest move to narrow the broad rate corridor is "neutral with regard to the direction of monetary policy." It would contribute to curb volatility in money market rates.

The central bank head Sergei Ignatiev on Thursday said the current exchange rate of ruble reflects political risks.

As on December 19, annual inflation slowed to 6.4 percent from 6.8 percent in November. The central bank forecasts inflation to ease notably early next year.

In a note, Neil Shearing, chief emerging market economist at Capital Economics observed that a cut in interest rates could ultimately prove self-defeating.

While slowing growth and easing inflation support loose monetary policy stance, lower rates would only exacerbate capital outflows, intensifying the squeeze in interbank lending markets, the economist said. The firm expects a further hike in the overnight deposit rate to 4.5 percent by end-2012.

RTTNews