The Board of the Central Bank of Russia (CBR) resolved to keep the key interest rate unchanged at 9% at the policy meeting on July 28, the regulator said in a press release.

The decision to pause the monetary easing cycle was expected due to a recent surprise spike in inflation, expected currency movements, and increased external uncertainty.

A flat rate decision was expected by 12 out of 21 analysts surveyed by Reuters, while 9 expected a minimum cut of 25bp. The CBR cut the key interest rate at its three previous meetings this year.

In its release, the inflation-minded regulator noted that inflation remains close to the target level of 4%, but short-term and medium-term inflationary risks persist.

June's CPI registered 4.4% year-on-year and 0.6% month-on-month, which the head of the regulator's monetary and credit policy department Igor Dmitriev saw as "very high" and a "negative surprise".

Latest weekly inflation data suggested that the annual rate will stay in the 4.3-4.4% range, although daily and weekly readings moderated, and one-off factors such as tariff indexation remain the main inflationary drivers.

Alfa Bank on July 27 argued that this makes the expected deflation in August-September "more evident".

Looking forward, the central bank is concerned that deterioration in inflationary expectations can be caused by volatility of the global commodity and financial markets, as well as ruble volatility "in condition of heightened geopolitical risks".

On the domestic front, the CBR is likely to watch developments with recently recovering consumer demand, as it stressed the need to maintain a monetary policy "securing a balance growth of consumption" and warned against income growth outpacing productivity growth.

At the same time, the central bank does not seem to be concerned at recovery in  industry, as it sees no excess output gap and noted that "economic growth is nearing potential level" estimated at 1.5-2%.

The regulator did not rule out further key interest rate cuts at its next meeting scheduled for September 15. The consensus expectations are likely to target 25-50bp key rate cut from current 9% by the end of 2017.