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UPDATE 2-Russia keeps key rate at 4.25%, leaves door open for cuts

* Bank of Russia keeps key rate at 4.25%

* Decision in line with expectations

* Central bank says will study need for lower rates

* Rouble steady after decision (Adds central bank, analyst comments)

By Andrey Ostroukh, Elena Fabrichnaya and Gabrielle Tétrault-Farber

MOSCOW, Oct 23 (Reuters) - Russia’s central bank kept interest rates at a record low on Friday amid increased geopolitical risks but said there was room for lower rates as the COVID-19 pandemic situation was deteriorating.

The Bank of Russia held its key rate at 4.25%, in line with a Reuters poll that forecast Russia would keep the cost of lending unchanged before the U.S. presidential election.

The central bank said the recent weakening in the rouble, which fell to its lowest since early 2016 against the euro in September, was still filtering into consumer inflation, the bank’s main area of responsibility.

But the coronavirus pandemic and a potential slowdown in the global economy will have disinflationary effects, Governor Elvira Nabiullina said.

“We still see room for a key rate decrease,” Nabiullina told an online media conference.

The central bank started cutting rates early this year when the economy suffered from a plunge in the price of oil, Russia’s main export, and from the coronavirus pandemic and subsequent lockdowns that curtailed business activity.

In a statement, the central bank repeated its wording from a month ago and said it will “consider the necessity of further key rate reduction at its upcoming meetings.”

Though it was uncertain if the central bank will hold rates again or cut them as soon as at the next meeting on Dec. 18, some analysts saw room for more easing next year.

The key rate may dive below 4% in 2021, Locko Invest said.

“We have pencilled in 25bp rate cut at the meeting in February and we think the repo rate will be lowered to 3.50% by end-2021,” Capital Economics said.

The central bank said on Friday monetary policy will remain soft in 2021, having said before it saw no need for negative rates when the key rate is below inflation, which it targets at 4%.

Lower rates support the economy through cheaper lending but can also increase inflation, the central bank’s main remit, and make the rouble more vulnerable to external shocks.

The central bank said it had improved its 2020 economic contraction forecast to 4% to 5% from 4.5% to 5.5% but lowered its expectations for 2021 growth to 3% to 4% from 3.5% to 4.5%.

The rouble showed limited reaction to the rate decision and traded at 76.36 against the U.S. dollar. (Writing by Andrey Ostroukh; additional reporting by Polina Devitt, Alexander Marrow, Darya Korsunskaya, Anastasia Lyrchikova; editing by Andrew Osborn, Larry King)

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