By Elena Fabrichnaya
MOSCOW, July 16 (Reuters) - Russia's central bank will consider cutting interest rates next week, but it has already used much of its room to ease policy and foresees limits to what it can do in the future, Deputy Governor Alexei Zabotkin told Reuters.
The central bank slashed its key rate by 100 basis points, the biggest cut in five years, to a record low of 4.5% at its last meeting. It was the third reduction this year as it copes with a contracting economy and low inflation.
Although the bank sees a "significant risk" inflation will remain below its 4% target next year, Zabotkin said further policy easing is likely to be more gradual. The key rate was at 6.25% at the start of this year.
"Most likely the pace of further cuts will be more gradual given that a significant part of the room for easing has already been used," he said. The central bank's board is due to meet on July 24 for its next key rate setting decision.
With the Russian economy forecast to shrink by as much as 6% this year, the government plans to spend nearly 4 trillion roubles ($56 billion) to fight the economic fallout from coronavirus.
The need for additional funds forced the finance ministry to temporary soften its fiscal rule to increase spending, the bulk of which will be secured via printing fresh state rouble OFZ bonds.
The central bank, which in the past was at odds with the finance ministry over the pace of budget spending and the potential impact on its inflation goals, has praised the ministry's efforts.
"This year, the budget policy comes in form of stimulus which substantially supports demand and curbs existing disinflation trends," Zabotkin said.
The central bank saw no threat from the finance ministry's plans to increase state debt, he said, but added it was important to return to the fiscal rule - and the spending ceilings therein - after the crisis is over in 2021-2022.
($1 = 71.2600 roubles)
(Reporting by Elena Fabrichnaya, writing by Katya Golubkova; Editing by Toby Chopra)
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